[Federal Register Volume 74, Number 198 (Thursday, October 15, 2009)]
[Rules and Regulations]
[Pages 53004-53084]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-24284]



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Part II





Internal Revenue Service





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26 CFR Parts 1 and 602



Measurement of Assets and Liabilities for Pension Funding Purposes; 
Benefit Restrictions for Underfunded Pension Plans; Final Rule

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

[[Page 53004]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 9467]
RIN 1545-BG72; RIN 1545-BH07


Measurement of Assets and Liabilities for Pension Funding 
Purposes; Benefit Restrictions for Underfunded Pension Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations providing guidance 
regarding the determination of the value of plan assets and benefit 
liabilities for purposes of the funding requirements that apply to 
single employer defined benefit plans, regarding the use of certain 
funding balances maintained for those plans, and regarding benefit 
restrictions for certain underfunded defined benefit pension plans. 
These regulations reflect provisions added by the Pension Protection 
Act of 2006, as amended by the Worker, Retiree, and Employer Recovery 
Act of 2008. These regulations affect sponsors, administrators, 
participants, and beneficiaries of single employer defined benefit 
pension plans.

DATES: Effective Date: These regulations are effective on October 15, 
2009.
    Applicability Date: These regulations apply to plan years beginning 
on or after January 1, 2010.

FOR FURTHER INFORMATION CONTACT: Michael P. Brewer, Lauson C. Green, or 
Linda S.F. Marshall at (202) 622-6090 (not a toll-free number).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    The collections of information contained in these final regulations 
have been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)) under control number 1545-2095. The collections of information 
in this final regulation are in Sec. Sec.  1.430(f)-1(f), 1.430(h)(2)-
1(e), 1.436-1(f), and 1.436-1(h). The information required under Sec.  
1.430(f)-1(f) is required in order for plan sponsors to make elections 
regarding a plan's credit balances upon occasion. The information 
required under Sec.  1.430(h)(2)-1(e) is required in order for a plan 
sponsor to make an election to use an alternative interest rate for 
purposes of determining a plan's funding obligations under Sec.  
1.430(h)(2)-1. The information required under Sec. Sec.  1.436-1(f) and 
1.436-1(h) is required in order for a qualified defined benefit plan's 
enrolled actuary to provide a timely certification of the plan's 
adjusted funding target attainment percentage (AFTAP) for each plan 
year to avoid certain benefit restrictions.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    This document contains final Income Tax Regulations (26 CFR part 1) 
under sections 430(d), 430(f), 430(g), 430(h)(2), 430(i), and 436, as 
added to the Internal Revenue Code (Code) by the Pension Protection Act 
of 2006 (PPA '06), Public Law 109-280 (120 Stat. 780), and amended by 
the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA '08), 
Public Law 110-458 (122 Stat. 5092).
    Section 412 provides minimum funding requirements that generally 
apply for pension plans (including both defined benefit pension plans 
and money purchase pension plans). PPA '06 makes extensive changes to 
those minimum funding requirements for defined benefit plans that 
generally apply for plan years beginning on or after January 1, 2008. 
Section 430, which was added by PPA '06, specifies the minimum funding 
requirements that apply to single employer defined benefit pension 
plans (including multiple employer plans) pursuant to section 412. 
Section 436, which was also added by PPA '06, sets forth certain 
limitations on benefits that may apply to a single employer defined 
benefit plan based on its funded status. Neither section 430 nor 
section 436 applies to multiemployer plans.
    Section 302 of the Employee Retirement Income Security Act of 1974, 
as amended (ERISA), sets forth funding rules that are parallel to those 
in section 412 of the Code, and section 303 of ERISA sets forth 
additional funding rules for single employer plans that are parallel to 
those in section 430 of the Code. In addition, section 206(g) of ERISA 
sets forth benefit limitations that are parallel to those in section 
436 of the Code. Under section 101 of Reorganization Plan No. 4 of 1978 
(43 FR 47713) and section 3002(c) of ERISA, the Secretary of the 
Treasury has interpretive jurisdiction over the subject matter 
addressed in these regulations for purposes of ERISA, as well as the 
Code. Thus, these final Treasury Department regulations issued under 
sections 430 and 436 of the Code apply for purposes of sections 206(g) 
and 303 of ERISA.
    If the value of plan assets (less the sum of the plan's prefunding 
balance and funding standard carryover balance) is less than the 
funding target, section 430(a)(1) defines the minimum required 
contribution as the sum of the plan's target normal cost and the 
shortfall and waiver amortization charges for the plan year. If the 
value of plan assets (less the sum of the plan's prefunding balance and 
funding standard carryover balance) equals or exceeds the funding 
target, section 430(a)(2) defines the minimum required contribution as 
the plan's target normal cost for the plan year reduced (but not below 
zero) by the amount of the excess.
    Under section 430(d), except as otherwise provided in section 
430(i)(1) (regarding at-risk status), a plan's funding target for a 
plan year is the present value of all benefits accrued or earned under 
the plan as of the beginning of the plan year.
    Prior to amendment by WRERA '08, section 430(b) defined a plan's 
target normal cost for a plan year as the present value of all benefits 
expected to accrue or be earned under the plan during the plan year 
(with any increase in any benefit attributable to services performed in 
a preceding plan year by reason of a compensation increase during the 
current plan year treated as having accrued during the current plan 
year). Section 101(b)(2) of WRERA '08 amended section 430(b) to modify 
the definition of a plan's target normal cost by adding the amount of 
plan-related expenses expected to be paid from plan assets during the 
plan year, and by subtracting the amount of mandatory employee 
contributions expected to be made during the plan year. This 
modification applies to plan years beginning after December 31, 2008; 
however, a plan sponsor is permitted to elect to apply this 
modification beginning with the first plan year beginning after 
December 31, 2007.
    Under section 430(f)(3), certain funding balances--referred to as 
the prefunding balance and the funding standard carryover balance--are 
permitted to be used to reduce the otherwise applicable minimum 
required contribution for a plan year in certain situations. Under 
section 430(f)(6), the prefunding balance represents the accumulation 
of the contributions that

[[Page 53005]]

an employer makes for a plan year that exceed the minimum required 
contribution for the year. An employer that makes contributions for a 
plan year that exceed the minimum required contribution for the year is 
permitted in certain circumstances to use those excess contributions in 
order to satisfy the minimum funding requirement in a subsequent plan 
year. However, section 430(f)(6)(iii) provides that contributions 
required to avoid a benefit restriction under section 436 are 
disregarded for purposes of determining the extent to which 
contributions for a plan year exceed the minimum required contribution 
for the plan year. Under section 430(f)(7), the funding standard 
carryover balance is based on the funding standard account credit 
balance as determined under section 412 for a plan as of the last day 
of the last plan year beginning in 2007.
    The treatment of these balances under section 430 reflects 
Congressional concern with the treatment of a funding standard account 
credit balance under the section 412 rules in effect prior to PPA '06. 
Accordingly, section 430(f)(3) sets forth a new restriction on the 
ability of a poorly funded plan to use the prefunding balance and the 
funding standard carryover balance as a credit against the minimum 
required contribution for a plan year. Under section 430(f)(3)(C), the 
prefunding balance or funding standard carryover balance can only be 
used for a plan year if the value of plan assets for the preceding plan 
year (after subtracting the prefunding balance) was at least 80 percent 
of the funding target (determined without regard to the at-risk rules 
of section 430(i)) for that preceding plan year. In addition, section 
430(f)(4) requires that the prefunding balance and the funding standard 
carryover balance be subtracted from the value of plan assets for 
certain purposes (including the determination of the plan's funding 
target attainment percentage (FTAP), as defined under section 
430(d)(2)), and section 430(f)(8) requires that the prefunding balance 
and the funding standard carryover balance be adjusted for actual 
investment return on plan assets. In order to give employers the 
opportunity to minimize the impact of the requirement to subtract the 
prefunding balance and funding standard carryover balance from plan 
assets, section 430(f)(5) permits an employer to elect to reduce those 
balances.
    Section 430(g)(1) provides that all determinations made with 
respect to minimum required contributions for a plan year (such as the 
value of plan assets and liabilities) are made as of the plan's 
valuation date. Section 430(g)(2) provides that, other than for plans 
with 100 or fewer participants (determined as provided in section 
430(g)(2)(B) and (C)), the valuation date for a plan year must be the 
first day of the plan year. Under section 430(g)(2)(B), all defined 
benefit pension plans (other than multiemployer plans) maintained by 
the employer, a predecessor employer, or by any member of the 
employer's controlled group are treated as a single plan for this 
purpose, but only participants with respect to the employer or member 
of the controlled group are taken into account.
    Section 430(g)(3) provides rules regarding the determination of the 
value of plan assets for purposes of section 430. Under section 
430(g)(3)(A), except as otherwise provided in section 430(g)(3)(B), the 
fair market value of plan assets must be used for this purpose. As an 
alternative to the use of fair market value, section 430(g)(3)(B) 
permits the use of an actuarial value of assets based on the average of 
fair market values, but only if such method is permitted under 
regulations prescribed by the Secretary, does not provide for averaging 
of such values over more than the period beginning on the last day of 
the 25th month preceding the month in which the valuation date occurs 
and ending on the valuation date (or a similar period in the case of a 
valuation date that is not the 1st day of a month), and does not result 
in a determination of the actuarial value of plan assets that, at any 
time, is lower than 90 percent or greater than 110 percent of the fair 
market value of plan assets as of the valuation date.
    Under section 430(g)(4), if a contribution made after the valuation 
date for the current plan year is a contribution for a preceding plan 
year, the contribution is taken into account in determining the value 
of plan assets for the current plan year. For 2009 and future plan 
years, only the present value (determined as of the valuation date for 
the current plan year, using the plan's effective interest rate for the 
preceding plan year) of the contributions made for the preceding plan 
year is taken into account. If any contributions for the current plan 
year are made before the valuation date (which could only occur for a 
small plan with a valuation date that is not the first day of the plan 
year), plan assets as of the valuation date must exclude those 
contributions and also must exclude interest on those contributions 
(determined at the plan's effective interest rate for the plan year) 
for the period between the date of the contribution and the valuation 
date. Under section 430(h)(2)(A), a plan's effective interest rate for 
a plan year is defined as the single interest rate that, if used to 
determine the present value of the benefits taken into account in 
determining the plan's funding target for the plan year in lieu of the 
interest rates under section 430(h)(2), would result in an amount equal 
to the plan's funding target determined for the plan year under section 
430(d).
    Under section 430(h)(1), the determination of any present value or 
other computation under section 430 is to be made on the basis of 
actuarial assumptions and methods each of which is reasonable (taking 
into account the experience of the plan and reasonable expectations) 
and which, in combination, offer the actuary's best estimate of 
anticipated experience under the plan.
    Section 430(h)(2) specifies the interest rates that must be used in 
determining a plan's target normal cost and funding target. Under 
section 430(h)(2)(B), present value is determined using three interest 
rates (segment rates) for the applicable month, each of which applies 
to benefit payments expected to be paid during a certain period. The 
first segment rate applies to benefits reasonably determined to be 
payable during the 5-year period beginning on the first day of the plan 
year. The second segment rate applies to benefits reasonably determined 
to be payable during the 15-year period following the initial 5-year 
period. The third segment rate applies to benefits reasonably 
determined to be payable after the end of that 15-year period.
    Section 430(h)(2)(C) defines each segment rate as a single interest 
rate determined for a month by the Treasury Department on the basis of 
the corporate bond yield curve for the month. Under section 
430(h)(2)(D), the corporate bond yield curve for a month is to be 
prescribed by the Treasury Department and is to reflect the average, 
for the 24-month period ending with the preceding month, of yields on 
investment grade corporate bonds with varying maturities that are in 
the top three quality levels available. Section 430(h)(2)(D)(ii) 
provides an alternative to the use of the three segment rates, under 
which the corporate bond yield curve (determined without regard to the 
24 month average) is substituted for the segment rates.
    Section 430(h)(2)(G) provides a transition rule for plan years 
beginning in 2008 and 2009 (other than for plans where the first plan 
year begins on or after January 1, 2008). Under this transition rule, 
the interest rates to be used in the valuation are based on a blend of 
the segment rates and the long-term corporate bond rates used for plan

[[Page 53006]]

years prior to the effective date of PPA '06. Under section 
430(h)(2)(G)(iv), a plan sponsor may elect to have this transition rule 
not apply.
    Section 430(i) sets forth special rules that apply to a plan that 
is in at-risk status. If a plan is in at-risk status, then special 
assumptions must be used in determining the plan's funding target and 
target normal cost, a loading factor is applied to the plan's 
liabilities in certain cases, and, under section 409A(b)(3), 
restrictions apply to the employer's ability to set aside assets for 
purposes of paying deferred compensation to a covered employee under a 
nonqualified deferred compensation plan.
    Under section 430(i)(4), a plan is in at-risk status for a year if, 
for the preceding year: (1) The plan's FTAP, determined without regard 
to the at-risk assumptions, was less than 80 percent (with a transition 
rule discussed in the next sentence); and (2) the plan's FTAP, 
determined using the at-risk assumptions (without regard to whether the 
plan was in at-risk status for the preceding year), was less than 70 
percent. Under a transition rule, reduced percentages apply for plan 
years beginning before 2011 instead of 80 percent in the first part of 
the test for determining at-risk status. Under section 430(i)(4), in 
the case of plan years beginning in 2008, the plan's FTAP for the 
preceding plan year is to be determined under rules provided by the 
Treasury Department.
    Under section 430(i)(6), the at-risk rules do not apply if a plan 
had 500 or fewer participants on each day during the preceding plan 
year. For this purpose, the number of participants is determined using 
the same rules as apply for determining whether a plan is a small plan 
for purposes of eligibility for the use of a valuation date other than 
the first day of the plan year. If a plan is in at-risk status, the 
plan's funding target and target normal cost are determined (under 
section 430(i)(1) and (2)) using special actuarial assumptions. Under 
these assumptions, all employees who are not otherwise assumed to 
retire as of the valuation date, but who will be eligible to elect to 
commence benefits in the current and 10 succeeding plan years, are 
assumed to retire at the earliest retirement date under the plan, but 
not before the end of the current plan year. In addition, all employees 
are assumed to elect the form of retirement benefit available under the 
plan for each assumed retirement age that results in the highest 
present value.
    The funding target of a plan in at-risk status for a plan year is 
generally the sum of: (1) The present value of all benefits accrued or 
earned as of the beginning of the plan year determined using the 
special assumptions described in this preamble; and (2) in the case of 
a plan that has been in at-risk status for at least 2 of the 4 
preceding plan years, a loading factor. That loading factor is equal to 
the sum of: (1) $700 multiplied by the number of participants in the 
plan; plus (2) 4 percent of the funding target determined as if the 
plan were not in at-risk status. The target normal cost of a plan in 
at-risk status for a plan year is generally the sum of: (1) The present 
value of benefits expected to accrue or be earned under the plan during 
the plan year; determined using the special assumptions described in 
this preamble; and (2) in the case of a plan that has been in at-risk 
status for at least 2 of the 4 preceding plans years, a loading factor 
of 4 percent of the present value of all benefits under the plan that 
accrue, are earned, or are otherwise allocated to service for the plan 
year (determined as if the plan were not in at-risk status). The target 
normal cost of a plan in at-risk status is adjusted for plan-related 
expenses expected to be paid from plan assets during the plan year and 
mandatory employee contributions expected to be made during the plan 
year under the same rules that apply to plans that are not in at-risk 
status.
    Under section 430(i)(3), the funding target of a plan in at-risk 
status and the target normal cost of a plan in at-risk status are never 
less than the respective funding target and target normal cost 
determined without regard to the at-risk rules. In addition, if a plan 
has been in at-risk status for fewer than 5 consecutive plan years, a 
phase-in rule applies to the determination of the funding target and 
the target normal cost under section 430(i)(5).
    Section 401(a)(29) requires that a defined benefit plan (other than 
a multiemployer plan) satisfy the requirements of section 436. Section 
436 sets forth a series of limitations on the accrual and payment of 
benefits under an underfunded plan. Under section 436(g), these 
limitations (other than the limitations on accelerated benefit payments 
under section 436(d)) do not apply to a plan for the first 5 plan years 
of the plan, taking into account any predecessor plan.
    Section 436(b) sets forth a limitation on plant shutdown and other 
unpredictable contingent event benefits in situations where the plan's 
adjusted funding target attainment percentage (AFTAP) for the plan year 
is less than 60 percent or would be less than 60 percent taking into 
account the occurrence of the event. For this purpose, an unpredictable 
contingent event benefit means any benefit payable solely by reason of 
(1) a plant shutdown (or a similar event), or (2) an event other than 
attainment of age, performance of service, receipt or derivation of 
compensation, or the occurrence of death or disability. Under section 
436(b)(2), the limitation does not apply for a plan year if the plan 
sponsor makes a specified contribution (in addition to any minimum 
required contribution). If the AFTAP for a plan year is less than 60 
percent, then the specified contribution is equal to the amount of the 
increase in the plan's funding target for the plan year attributable to 
the occurrence of the event. If the AFTAP for a plan year is 60 percent 
or more but would be less than 60 percent taking into account the 
occurrence of the event, then the specified contribution is the amount 
sufficient to result in an AFTAP of 60 percent taking into account the 
occurrence of the event.
    Under section 436(c), a plan amendment that has the effect of 
increasing the liabilities of the plan by reason of any increase in 
benefits (including changes in vesting) may not take effect if the 
plan's AFTAP for the plan year is less than 80 percent or would be less 
than 80 percent taking into account the amendment. Under section 
436(c)(2), the limitation does not apply for a plan year if the plan 
sponsor makes a specified contribution (in addition to any minimum 
required contribution). If the plan's AFTAP for the plan year is less 
than 80 percent, then the specified contribution is equal to the amount 
of the increase in the plan's funding target for the plan year 
attributable to the amendment. If the plan's AFTAP for the plan year is 
80 percent or more but would be less than 80 percent taking into 
account the amendment, then the specified contribution is the amount 
sufficient to result in an AFTAP of 80 percent taking into account the 
amendment. In addition, under section 436(c)(3), the limitation does 
not apply to an amendment that provides for a benefit increase under a 
formula that is not based on compensation, but only if the rate of 
increase does not exceed the contemporaneous rate of increase in 
average wages of participants covered by the amendment.
    Under section 436(d), a plan is required to set forth certain 
limitations on accelerated benefit distributions. If the plan's AFTAP 
for a plan year is less than 60 percent, the plan must not make any 
prohibited payments after the valuation date for the plan year. If the 
plan's AFTAP for a plan year is at least 60 percent but is less than 80 
percent, the plan must not pay any prohibited

[[Page 53007]]

payment to the extent the payment exceeds the lesser of (1) 50 percent 
of the amount otherwise payable under the plan and (2) the present 
value of the maximum PBGC guarantee with respect to a participant. In 
addition, if the plan sponsor is in bankruptcy proceedings, the plan 
may not pay any prohibited payment unless the plan's enrolled actuary 
certifies that the AFTAP of the plan is at least 100 percent. However, 
section 436(d) does not apply to a plan for a plan year if the terms of 
the plan provide for no benefit accruals with respect to any 
participant for the period beginning on September 1, 2005, and 
extending throughout the plan year.
    Under section 436(d)(5), a prohibited payment is (1) any payment in 
excess of the monthly amount paid under a single life annuity (plus any 
social security supplements that are provided under the plan) to a 
participant or beneficiary, (2) any payment for the purchase of an 
irrevocable commitment from an insurer to pay benefits, or (3) any 
other payment specified by the Secretary by regulations.
    Under section 436(e), a plan is required to provide that if the 
plan's AFTAP is less than 60 percent for a plan year, all benefit 
accruals under the plan must cease as of the valuation date for the 
plan year.\1\ Under section 436(e)(2), the limitation ceases to apply 
with respect to any plan year, effective as of the first day of the 
plan year, if the plan sponsor makes a contribution (in addition to any 
minimum required contribution for the plan year) equal to the amount 
sufficient to result in an AFTAP of 60 percent.
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    \1\ Pursuant to section 203 of WRERA, for the first plan year 
beginning during the period beginning on October 1, 2008, and ending 
on September 30, 2009, section 436(e)(1) is applied by substituting 
the plan's adjusted funding target attainment percentage for the 
preceding plan year for such percentage for such plan year but only 
if the adjusted funding target attainment percentage for the 
preceding plan year is greater.
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    Section 436(f) sets forth a series of rules relating to 
contributions required to avoid benefit restrictions. Under section 
436(f)(1), an employer is permitted to provide security to the plan (in 
the form of a surety bond, cash, United States obligations that mature 
in 3 years or less, or other form satisfactory to the Treasury 
Department and the parties involved) that is treated as an asset of the 
plan for purposes of determining the plan's AFTAP. Under section 
436(f)(2), if an employer uses the option in section 436(b)(2), 
436(c)(2), or 436(e)(2) to make the specified contribution that would 
avoid a limitation under section 436, the specified contribution must 
be an actual contribution and the employer may not use a prefunding 
balance or funding standard carryover balance in lieu of making the 
specified contribution.
    Section 436(f)(3) describes certain situations in which an employer 
is deemed to have made the election in section 430(f)(5) to reduce the 
plan's funding standard carryover balance or prefunding balance. Such 
an election has the effect of increasing the plan's AFTAP to avoid a 
benefit limitation under section 436 (because the result of the 
election is a higher asset value used to determine the AFTAP). In 
particular, if the limitation under section 436(d) would otherwise 
apply to a plan, the plan sponsor is treated as having made an election 
(a deemed election) to reduce any prefunding balance or funding 
standard carryover balance by the amount necessary to prevent the 
benefit limitation from applying. A comparable rule applies to the 
other benefit limitations under sections 436(b), 436(c), and 436(e), 
but only in the case of a plan maintained pursuant to a collective 
bargaining agreement. In any of these cases (the election with respect 
to the limitations under section 436(d) or a deemed election in the 
case of a plan maintained pursuant to a collective bargaining 
agreement), the deeming rule applies only if the prefunding balance and 
funding standard carryover balances are large enough to avoid the 
application of the section 436 limitation.
    Section 436(h) sets forth a series of presumptions that apply 
during the portion of the plan year that is before the plan's enrolled 
actuary has certified the plan's AFTAP for the year. Under section 
436(h)(1), if a plan was subject to a limitation under section 436(b), 
436(c), 436(d), or 436(e) for the plan year preceding the current plan 
year, the plan's AFTAP for the current year is presumed to be the same 
as for the preceding year until the plan's enrolled actuary certifies 
the plan's AFTAP for the current year (or until the first day of the 
10th month, if earlier). Under section 436(h)(3), if any of these 
limitations did not apply to the plan for the preceding year, but would 
have applied if the plan's AFTAP for the preceding year was 10 
percentage points lower, the plan's AFTAP is presumed to be 10 
percentage points lower than the AFTAP for the prior plan year as of 
the first day of the 4th month of the current plan year (and that day 
is deemed to be the plan's valuation date for purposes of applying the 
benefit limitations), unless the plan's enrolled actuary has certified 
the plan's AFTAP for the current year by that day. If the plan's 
enrolled actuary has not certified the plan's AFTAP by the first day of 
the 10th month of the current plan year, section 436(h)(2) provides 
that the plan's AFTAP is conclusively presumed to be less than 60 
percent as of that day (and that day is deemed to be the valuation date 
for purposes of applying the benefit limitations).
    Under section 436(i), unless the plan provides otherwise, if a 
limitation on prohibited payments or future benefit accruals under 
section 436(d) or (e) ceases to apply to a plan, those payments and 
benefit accruals resume, effective as of the day following the close of 
the limitation period.
    Section 436(j) provides definitions that are used under section 
436, including the definition of AFTAP. In general, a plan's AFTAP is 
based on the plan's FTAP for the plan year. However, the plan's AFTAP 
is determined by adding the aggregate amount of purchases of annuities 
for employees other than highly compensated employees (within the 
meaning of section 414(q)) made by the plan during the two preceding 
plan years to the numerator and the denominator of the fraction used to 
determine the FTAP. In addition, section 436(j)(3) provides a special 
rule which applies to certain well-funded plans under which the plan's 
FTAP for purposes of section 436 (and hence the plan's AFTAP) is 
determined by using the plan's assets without reduction for the 
prefunding balance and the funding standard carryover balance. Section 
436(j)(3)(B) sets forth a transition rule for determining eligibility 
for this special rule.
    Section 436(k), as added by WRERA '08, provides the Secretary with 
authority to issue special rules for the application of section 436 in 
the case of a plan that uses a valuation date other than the first day 
of the plan year.
    Section 436(m) (designated section 436(k) prior to amendment by 
WRERA '08) provides that, for plan years that begin in 2008, the 
determination of the plan's FTAP for the preceding year is to be made 
pursuant to guidance issued by the Secretary.
    Under section 101(j) of ERISA, as amended by PPA '06, the plan 
administrator of a single employer plan is required to provide a 
written notice to participants and beneficiaries within 30 days after 
certain specified dates. These dates include the date the plan has 
become subject to a restriction described in the ERISA provisions that 
are parallel to Code sections 436(b) and 436(d) and, in the case of a 
plan that is subject to the ERISA provisions that are parallel to Code 
section 436(e), the valuation date for the plan year for

[[Page 53008]]

which the plan's AFTAP is less than 60 percent (or, if earlier, the 
date the AFTAP is presumed to be less than 60 percent under the ERISA 
provisions that parallel the presumption rules in Code section 436(h)). 
Under section 101(j) of ERISA, the Secretary of the Treasury can 
specify other dates under which notice is to be provided. Any notice 
under section 101(j) of ERISA must be provided in writing, except that 
the notice may be in electronic or other form to the extent that such 
form is reasonably accessible to the recipient.
    Sections 430 and 436 generally apply to plan years beginning on or 
after January 1, 2008. The applicability of section 430 for purposes of 
determining the minimum required contribution and the application of 
section 436 is delayed for certain plans in accordance with sections 
104 through 106 of PPA '06.
    Under section 1107 of PPA '06, a plan sponsor is permitted to delay 
adopting a plan amendment pursuant to statutory provisions under PPA 
'06 (or pursuant to any regulation issued under PPA '06) until the last 
day of the first plan year beginning on or after January 1, 2009 
(January 1, 2011, in the case of governmental plans). If section 1107 
of PPA '06 applies to an amendment of a plan, section 1107 provides 
that the plan does not fail to meet the anti-cutback requirements of 
section 411(d)(6) by reason of such amendment, except as otherwise 
provided by the Secretary of the Treasury.
    Proposed regulations regarding the rules for funding balances under 
section 430(f) and the benefit restrictions for underfunded plans under 
section 436 were published on August 31, 2007 (REG-113891-07, 72 FR 
50544). The regulations were proposed to apply to plan years beginning 
on or after January 1, 2008. Comments were received regarding the 
regulations, and a public hearing was held on January 28, 2008.
    Proposed regulations regarding the measurement of assets and 
liabilities for pension funding purposes (generally covering the rules 
of sections 430(d), (g), (h)(2), and (i)) were published on December 
31, 2007 (REG-139236-07, 72 FR 74215). The regulations were proposed to 
apply to plan years beginning on or after January 1, 2009. Comments 
were received regarding the regulations, and a public hearing was held 
on May 29, 2008.
    Notice 2008-21 (2008-1 CB 431) provides that the regulations under 
section 430(f) and 436 will not apply to plan years beginning before 
January 1, 2009. See Sec.  601.601(d)(2) relating to objectives and 
standards for publishing regulations, revenue rulings and revenue 
procedures in the Internal Revenue Bulletin. Notice 2008-21 also 
provides that the IRS will not challenge a reasonable interpretation of 
an applicable provision under section 430 or 436 for a plan year 
beginning in 2008 and provides transitional guidance with respect to 
years before the regulations are effective.
    On December 23, 2008, WRERA '08 was enacted. WRERA '08 contains 
technical corrections and other changes to the rules of sections 430 
and 436, including a modification to the asset valuation method set 
forth in section 430(g)(3)(B). Notice 2009-22 (2009-14 IRB 741) 
provides interim rules regarding the asset valuation method as modified 
by WRERA '08.

Explanation of Provisions

I. Overview

    These regulations finalize the rules proposed in REG-113891-07 
(published August 31, 2007), regarding funding balances and benefit 
restrictions for underfunded plans, and the rules proposed in REG-
139236-07 (published December 31, 2007), regarding measurement of 
assets and liabilities for pension funding purposes, with certain 
revisions. The Treasury Department and the IRS published proposed 
regulations relating to other portions of the rules under section 430 
(including sections 430(a), (c), and (j)) on April 15, 2008 (REG-
108508-08, 72 FR 20203). Those regulations will be finalized 
separately.

II. Section 1.430(d)-1 Determination of Funding Target and Target 
Normal Cost

    Section 1.430(d)-1 generally adopts the rules set forth in the 
proposed regulations for determining the funding target and the target 
normal cost under sections 430(b) and 430(d) for a plan that is not in 
at-risk status, including rules relating to the application of 
actuarial assumptions described in sections 430(h)(1) and 430(h)(4).
    The final regulations generally adopt the definition of target 
normal cost for a plan that is not in at-risk status that was set forth 
in the proposed regulations. However, the final regulations contain 
modifications to this definition to reflect amendments made by WRERA 
'08. Under the proposed regulations, plan administrative expenses would 
not have been taken into account in determining a plan's target normal 
cost or funding target for the plan year. Under the final regulations, 
the target normal cost of a plan for the plan year is the present value 
(determined as of the valuation date) of all benefits under the plan 
that accrue during, are earned during, or are otherwise allocated to 
service for the plan year, subject to certain special adjustments as 
added by section 101(b)(2) of WRERA '08. These special adjustments are 
optional for plan years beginning during 2008, but are required to be 
made for later plan years.
    Under the special adjustments, the target normal cost of the plan 
for the plan year is adjusted (not below zero) by adding the amount of 
plan-related expenses expected to be paid from plan assets during the 
plan year, and by subtracting the amount of any mandatory employee 
contributions expected to be made during the plan year. For this 
purpose, the final regulations reserve the issue of the definition of 
plan-related expenses, which is expected to be addressed in forthcoming 
proposed regulations.
    The regulations clarify that the benefits taken into account in 
determining target normal cost are the benefits that are accrued, 
earned, or otherwise allocated to service beginning with the first day 
of the plan year through the valuation date, plus benefits that are 
expected to accrue, be earned, or otherwise allocated to service during 
the remainder of the plan year. Thus, for a plan with a valuation date 
other than the first day of the plan year, the actual benefits earned 
during the part of the year before the valuation date must be included 
in the target normal cost. The final regulations generally adopt the 
definition of the funding target for a plan that is not in at-risk 
status as set forth in the proposed regulations, but with a few 
clarifications that take into account comments received on the proposed 
regulations. Under the regulations, the funding target of a plan for 
the plan year is the present value (determined as of the valuation 
date) of all benefits under the plan that have been accrued, earned, or 
are otherwise allocated to years of service prior to the first day of 
the plan year.
    Under the proposed regulations, the definition of a plan's FTAP was 
set forth in proposed Sec.  1.430(i)-1. These final regulations include 
this definition in Sec.  1.430(d)-1, and the definition is cross-
referenced in Sec. Sec.  1.430(i)-1 and 1.436-1. Under the final 
regulations, except as otherwise provided in a transition rule, the 
FTAP of a plan for a plan year is a fraction (expressed as a 
percentage), the numerator of which is the value of plan assets for the 
plan year after subtraction of the plan's funding balances under 
section 430(f)(4)(B) and Sec.  1.430(f)-1, and the denominator of which 
is the funding target of the plan for the plan year (determined without 
regard to the at-risk rules under section 430(i) and Sec.  1.430(i)-1).

[[Page 53009]]

    The regulations provide transition rules for determining a plan's 
FTAP for the 2007 plan year. These rules are generally the same as the 
rules set forth in the proposed regulations under section 430(i) for 
determining a plan's FTAP for the last plan year before section 430 
applies to the plan. However, the final regulations differ from the 
proposed regulations in the transition rules that apply for the 
determination of a plan's FTAP for a plan year that begins on or after 
January 1, 2008, but for which section 430 does not apply for purposes 
of determining the plan's minimum required contribution. In such a 
case, the FTAP is determined for that plan year in the same manner as 
for a plan to which section 430 applies to determine the plan's minimum 
required contribution, except that the value of plan assets that forms 
the FTAP numerator is determined without subtraction of the funding 
standard carryover balance or the credit balance under the funding 
standard account. These rules are needed to enable a plan described in 
sections 104 through 106 of PPA '06 to disclose its FTAP for purposes 
of the annual funding notice under section 101(f) of ERISA.\2\
---------------------------------------------------------------------------

    \2\ Section 430(i)(4) provides for special rules to apply in 
determining a plan's FTAP only for plan years beginning during 2008. 
Accordingly, the regulations limit the use of the special rule under 
which the plan's FTAP is determined based on the plan's current 
liability to the determination of the plan's FTAP for the 2007 plan 
year, even for a plan described in sections 104 through 106 of PPA 
'06 for which section 430 does not apply for purposes of determining 
a plan's minimum required contribution until a plan year after the 
2008 plan year.
---------------------------------------------------------------------------

    The regulations adopt the special rule set forth in the proposed 
regulations for determining the FTAP for a new plan. Under the final 
regulations, if the funding target of the plan is equal to zero for the 
plan year, the FTAP is equal to 100 percent for the plan year. Unlike 
the proposed regulations, the final regulations do not limit the 
application of this rule to a plan that has no predecessor plan because 
of concerns that it is not always appropriate to carry over the FTAP 
from the predecessor plan.
    The final regulations contain rules regarding the determination of 
present value in order to clarify the application of various rules that 
were set forth in the proposed regulations. Under the regulations, the 
present value of a benefit with respect to a participant that is taken 
into account under the regulations is determined as of the valuation 
date by multiplying the amount of that benefit by the probability that 
the benefit will be paid at a future date and then discounting the 
resulting product using the appropriate interest rate. The probability 
that the benefit will be paid with respect to the participant at that 
future date is determined using actuarial assumptions as to the 
probability of future service, advancement in age, and other events 
(such as death, disability, termination of employment, and selection of 
an optional form of benefit) that affect whether the participant or 
beneficiary will be eligible for the benefit and whether the benefit 
will be paid at that future date.
    As under the proposed regulations, these regulations provide that 
the benefits taken into account in determining the funding target and 
the target normal cost are all benefits earned or accrued under the 
plan that have not yet been paid as of the valuation date, including 
retirement-type and ancillary benefits. The benefits taken into account 
are based on the participant's or beneficiary's status (such as active 
employee, vested or partially vested terminated employee, or disabled 
participant) as of the valuation date, and those benefits are allocated 
to funding target or target normal cost.
    In order to determine a plan's funding target and target normal 
cost, the future benefits to be paid from the plan must be allocated 
among prior plan years (in which case they will be taken into account 
in determining the funding target for the current plan year), the 
current plan year (in which case they will be taken into account in 
determining the target normal cost for the current plan year), and 
future plan years (in which case they will not be taken into account in 
determining either the funding target or the target normal cost for the 
current plan year). The final regulations adopt the rules set forth in 
the proposed regulations for this allocation of benefits where benefits 
are a function of the accrued benefit and where benefits are a function 
of service, but the final regulations modify those rules for benefits 
in other circumstances.
    To the extent that the amount of a benefit that is expected to be 
paid is a function of the accrued benefit, the amount of the benefit 
taken into account in determining the funding target for a plan year 
under the final regulations is determined by applying that function to 
the accrued benefit as of the first day of the plan year, and the 
portion of the benefit that is taken into account in the target normal 
cost for the plan year is determined by applying that function to the 
increase in the accrued benefit during the plan year. To the extent 
that the amount of a benefit that is expected to be paid is not a 
function of the accrued benefit but is a function of the participant's 
service, the portion of the benefit that is taken into account in 
determining the funding target for the plan year under the final 
regulations is determined by applying that function to the 
participant's service as of the first day of the plan year, and the 
portion of the benefit that is taken into account in determining the 
target normal cost for the plan year is determined by applying that 
function to the increase in the participant's years of service during 
the plan year. For a benefit that is determined as the excess of a 
function of the participant's service over a function of the 
participant's accrued benefit, the amount of the funding target and the 
target normal cost attributable to the portion of the benefit that is a 
function of the accrued benefit is determined pursuant to the rules 
that apply to such benefits and the amount of the funding target and 
the target normal cost attributable to the net benefit (the excess of 
the benefit that is a function of service over the benefit that is a 
function of accrued benefit) is determined pursuant to the rules that 
apply to a benefit that is a function of service.
    The proposed regulations included rules for allocating benefits 
where the amount of a benefit that is expected to be paid is neither a 
function of the accrued benefit at the time the benefit is expected to 
be paid nor a function of the participant's service at that time. Under 
those rules, the benefit would have been allocated proportionately over 
the years until the participant met the age and service conditions for 
eligibility for the benefit. A number of commenters suggested that this 
allocation yielded inappropriate results in certain cases. In response 
to these comments, the final regulations provide that, to the extent 
the amount of a benefit that is expected to be paid is neither a 
function of the accrued benefit nor a function of the participant's 
service (and is not the excess of a function of the participant's 
service over a function of the accrued benefit), the portion of the 
participant's benefit that is taken into account in determining the 
funding target for a plan year is equal to the total benefit multiplied 
by the ratio of the participant's years of service as of the first day 
of the plan year to the years of service the participant will have at 
the time of the event that causes the benefit to be payable (whether 
the benefit is expected to be paid at the time of that decrement or at 
a future time), and the portion of the benefit that is taken into 
account in determining the

[[Page 53010]]

target normal cost for the plan year is the increase in the 
proportionate benefit attributable to the increase in the participant's 
years of service during the plan year.
    Under the proposed regulations, the determination of the funding 
target and the target normal cost would not have taken into account any 
benefit limitations or anticipated benefit limitations under section 
436. The reason for this provision was to avoid the circularity in 
calculations that would result from calculating the funding target 
based on the imposition of benefit restrictions for purposes of 
determining whether the benefit restrictions need to be imposed. In 
response to comments, the final regulations contain modifications to 
the rules regarding recognition of the section 436 benefit 
restrictions. In particular, the final regulations provide that 
benefits that were not paid or accrued prior to the valuation date as a 
result of the benefit limitations are generally not included in the 
funding target and the target normal cost, but that the determination 
of the funding target and the target normal cost is not permitted to 
anticipate any future applications of the section 436 benefit 
restrictions.
    The final regulations retain the treatment from the proposed 
regulations regarding the non-recognition of the benefit accrual 
limitations of section 436(e) in determining target normal cost. This 
has the effect of requiring an employer sponsoring a plan that provides 
for ongoing benefit accruals to include the present value of those 
accruals in the target normal cost, even if the plan is temporarily not 
permitted to provide for accruals, with the goal of improving the 
plan's funded status. However, if the plan sponsor actually adopts a 
plan freeze, the target normal cost will reflect that plan freeze. In 
connection with this provision, the final regulations provide that if 
the plan contains a provision under which missed benefit accruals are 
automatically restored once the plan's AFTAP is above 60 percent 
(taking into account the missed benefit accruals), then any missed 
benefit accruals for the prior plan year are taken into account in 
determining the funding target if, as of the valuation date, the period 
of the missed benefit accruals is 12 months or less. The final 
regulations also contain rules regarding restrictions that arise as a 
result of benefit limitations that are imposed under section 401(a)(32) 
as a result of a liquidity shortfall and benefit limitations that are 
imposed under Sec.  1.401(a)(4)-5(b) with respect to certain highly 
compensated employees.
    As under the proposed regulations, these regulations provide that a 
plan generally is required to reflect in the plan's funding target and 
target normal cost the liability for benefits that are funded through 
insurance contracts held by the plan, and to include the corresponding 
insurance contracts in plan assets.\3\ As an alternative treatment of 
benefits that are funded through insurance contracts, the regulations 
provide that the plan is permitted to exclude benefits provided under 
such contracts from the plan's funding target and target normal cost 
and to exclude the corresponding insurance contracts from plan assets. 
This treatment is only available with respect to insurance purchased 
from an insurance company licensed under the laws of a State and only 
to the extent that a participant's or beneficiary's right to receive 
those benefits is an irrevocable contractual right under the insurance 
contract, based on premiums paid to the insurance company prior to the 
valuation date under the insurance contracts. Thus, the alternative 
treatment is not available if the plan trustee can surrender a contract 
to the insurer for its cash value because the participant's or 
beneficiary's rights to receive those benefits is not an irrevocable 
contractual right. A plan's treatment of benefits funded through 
insurance contracts pursuant to either of these methods is part of the 
plan's funding method. Accordingly, that treatment can be changed only 
with the consent of the Commissioner.
---------------------------------------------------------------------------

    \3\ The PBGC has informed the IRS and Treasury Department that 
this inclusion of insurance contracts in plan assets and the 
associated benefit liabilities in the funding target does not apply 
for purposes of Title IV of ERISA and its regulations, which 
generally require that, if an insurer makes an irrevocable 
commitment to provide all benefit liabilities with respect to an 
individual, those benefits cease to be benefit liabilities of the 
plan, the individual is no longer a plan participant, and the 
irrevocable commitment is excluded from plan assets.
---------------------------------------------------------------------------

    Except as otherwise provided, the determination under the 
regulations of a plan's funding target and target normal cost for a 
plan year are determined based on plan provisions that are adopted no 
later than the valuation date for the plan year and that take effect 
during that plan year. For example, a plan amendment adopted on or 
before the valuation date for the plan year that has an effective date 
occurring in the current plan year is taken into account in determining 
the funding target and the target normal cost for the current plan year 
if it is permitted to take effect under the rules of section 436(c) for 
the current plan year; however, an amendment is not taken into account 
if it does not take effect until a future plan year.
    The regulations apply the rules under section 436(c) (as described 
in section VII.C of this preamble) to determine when an amendment that 
increases benefits takes effect. For an amendment that decreases 
benefits, the amendment takes effect under a plan on the first date on 
which the benefits of any individual who is or could be a participant 
or beneficiary under the plan would be decreased due to the amendment 
if the individual were on that date to satisfy the applicable 
conditions for the benefits.
    The regulations provide that section 412(d)(2) applies for purposes 
of determining whether a plan amendment is treated as having been 
adopted on the first day of the plan year (including a plan amendment 
adopted no later than 2\1/2\ months after the close of the plan year). 
This is consistent with the IRS's prior interpretations of the pre-PPA 
'06 counterpart to section 412(d)(2) (section 412(c)(8) as in effect 
prior to amendments made by PPA '06) as set forth in Rev. Rul. 79-325 
(1979-2 CB 190), which provides that section 412(c)(8) applies to plan 
amendments made during the plan year (as well as to plan amendments 
made within 2\1/2\ months after the end of the plan year). Thus, if an 
amendment is adopted after the valuation date for a plan year (and no 
later than 2\1/2\ months after the close of the plan year) but takes 
effect during that plan year, the full increase in liability is taken 
into account as of the valuation date for that plan year if a section 
412(d)(2) election is made, and none of the increase in liability is 
taken into account as of the valuation date for that plan year if no 
section 412(d)(2) election is made.
    Accordingly, the rule in section 2.02 of Revenue Ruling 77-2 (1977-
1 CB 120) under which the charges for a plan year are based on a blend 
of the charges determined with and without regard to the plan 
amendment, and the alternative to that rule in section 3 of Revenue 
Ruling 77-2, no longer apply. However, the rule in section 2.01 of 
Revenue Ruling 77-2 (under which a change in benefit structure that 
does not become effective until a future plan year is disregarded) 
continues to apply. This is because section 430 does not contain any 
provision that corresponds to section 412(c)(12) as in effect prior to 
amendments made by PPA '06 (under which the provisions of a collective 
bargaining agreement were taken into account for funding purposes 
before the corresponding plan amendments became effective).

[[Page 53011]]

    The regulations clarify that if an amendment is taken into account 
for a plan year, then the allocation of benefits that is used for 
purposes of determining the funding target and the target normal cost 
for the plan year is based on the plan as amended. Thus, the present 
value of the increase in the participant's accrued benefit attributable 
to service before the beginning of the plan year is taken into account 
in the funding target for the year.\4\
---------------------------------------------------------------------------

    \4\ The regulations do not address the effect on the 
determination of a plan's funding shortfall of an amendment that is 
permitted to take effect on account of a contribution under section 
436(c)(2).
---------------------------------------------------------------------------

    To address a concern regarding avoidance of the benefit 
restrictions under section 436(c), the final regulations contain a new 
rule regarding amendments adopted after the valuation date that 
increase the target normal cost for the plan year. Under this rule, in 
any case in which an increase in the target normal cost as the result 
of a plan amendment made after the valuation date would have caused the 
benefit restrictions of section 436(c) to apply if the increase were 
included in the plan's funding target (after taking into account all 
unpredictable contingent event benefits permitted to be paid for 
unpredictable contingent events that occurred during the current plan 
year and plan amendments that went into effect in the current plan 
year), the amendment must be taken into account in determining the 
plan's funding target and target normal cost for the plan year. This 
rule is necessary to prevent the avoidance of the benefit restrictions 
of section 436(c) by means of a mid-year plan amendment that purports 
not to increase benefits earned prior to the beginning of the plan year 
(so that the amendment does not increase the funding target for the 
plan year and the amount required to ``buy up'' the amendment under 
section 436(c)(2) by paying the increase to the funding target on 
account of the amendment would be zero).
    Like the proposed regulations, the regulations require all 
currently employed plan participants, formerly employed plan 
participants (including retirees and terminated vested participants), 
and other individuals currently entitled to benefits under the plan to 
be included in the valuation. Unlike Sec.  1.412(c)(3)-1(c)(3)(ii), the 
regulations do not permit exclusion from the valuation of those plan 
participants who could have been excluded from participation in the 
plan under the rules of section 410(a). However, the final regulations 
adopt the rules of Sec.  1.412(c)(3)-1(c)(3)(iii) (relating to the 
exclusion of terminated employees who do not have a vested benefit 
under the plan and whose service might be taken into account in future 
years upon return to service, but only if the plan's experience as to 
separated employees returning to service has been such that the 
exclusion would not be unreasonable) and the rules of Sec.  
1.412(c)(3)-1(d)(2) (under which the future participation in the plan 
of current employees who are not yet participants is permitted to be 
anticipated). Whether former employees who are terminated with 
partially vested benefits are assumed to return to service is 
determined under the same rules that apply to former employees without 
vested benefits.
    The regulations provide that the determination of any present value 
or other computation under section 430 must be made on the basis of 
actuarial assumptions and a funding method. Except as specifically 
provided, the same actuarial assumptions and funding method must be 
used for all computations under sections 430 and 436.
    The final regulations cross reference other regulations for the 
details of the statutorily specified interest rates, mortality tables, 
and actuarial assumptions that apply to plans in at-risk status. Under 
the final regulations, with respect to the actuarial assumptions used 
for the plan other than those that are specified by statute, each of 
those actuarial assumptions must be reasonable (taking into account the 
experience of the plan and reasonable expectations). In addition, the 
actuarial assumptions (other than the statutorily specified 
assumptions), in combination, must offer the plan's enrolled actuary's 
best estimate of anticipated experience under the plan. The final 
regulations provide that, in the case of a plan which has fewer than 
100 participants and beneficiaries who are not in pay status, the 
actuarial assumptions are permitted to assume no pre-retirement 
mortality, but only if that assumption would be a reasonable 
assumption.
    The regulations provide that actuarial assumptions established for 
a plan year cannot subsequently be changed for that plan year unless 
the Commissioner determines that the assumptions that were used are 
unreasonable. Similarly, the regulations provide that a funding method 
established for a plan year cannot subsequently be changed for that 
plan year unless the Commissioner determines that the use of that 
funding method for that plan year is impermissible. For this purpose, 
actuarial assumptions and funding methods are established by the timely 
completion (and filing, if required) of the actuarial report (Schedule 
SB, ``Single-Employer Defined Benefit Plan Actuarial Information'' of 
Form 5500, ``Annual Return/Report of Employee Benefit Plan'') for a 
plan year under section 6059. If the Schedule SB is not completed (and 
filed, if required) by the deadline, then the prior plan year actuarial 
assumptions and methods will continue to apply, unless the Commissioner 
permits or requires other actuarial assumptions or another funding 
method permitted under section 430 to be used for the current plan 
year.
    The regulations provide that a plan's funding method includes not 
only the overall funding method used by the plan, but also each 
specific method of computation used in applying the overall method. 
However, the choice of which actuarial assumptions are appropriate to 
the overall method or to the specific method of computation is not a 
part of the funding method. The assumed earnings rate used for purposes 
of determining the actuarial value of assets under section 430(g)(3)(B) 
is treated as an actuarial assumption, rather than as part of the 
funding method.
    In accordance with section 430(h)(4), the regulations provide rules 
relating to the probability that benefit payments will be paid as 
single sums or other optional forms under a plan and the impact of that 
probability on the determination of the present value of those benefit 
payments under section 430. In general, any determination of present 
value or any other computation under the regulations must take into 
account the probability that future benefit payments under the plan 
will be made in the form of optional forms of benefits provided under 
the plan (including single-sum distributions), determined on the basis 
of the plan's experience and other related assumptions, and any 
difference in the present value of future benefit payments that results 
from the use of actuarial assumptions in determining benefit payments 
in any such optional form of benefits that are different from those 
prescribed by section 430(h).
    The proposed regulations would have provided that, in the case of a 
distribution that is subject to section 417(e)(3) and that is 
determined using the applicable interest rates and applicable mortality 
table under section 417(e)(3), the computation of the present value of 
that distribution is treated as having taken into account any 
difference in present value that results from the use of actuarial 
assumptions

[[Page 53012]]

that are different from those prescribed by section 430(h) if the 
present value of the distribution is determined by valuing, using 
special actuarial assumptions, the annuity (either the deferred or 
immediate annuity) that is used under the plan to determine the amount 
of the distribution. The final regulations adopt that method and 
clarify that its use is mandatory for benefits determined using the 
section 417(e) actuarial assumptions.
    Under this special computation, for the period beginning with the 
annuity starting date for the distribution, the applicable mortality 
table under section 417(e)(3) that would apply to a distribution with 
an annuity starting date occurring on the valuation date is substituted 
for the mortality table under section 430(h)(3) that would otherwise be 
used. In determining the present value of a distribution, the final 
regulations adopt the rules in the proposed regulations and provide 
that if a plan uses the generational mortality tables under Sec.  
1.430(h)(3)-1(a)(4) or Sec.  1.430(h)(3)-2, the plan is permitted to 
use a 50-50 male-female blend of the annuitant mortality rates under 
the Sec.  1.430(h)(3)-1(a)(4) generational mortality tables in lieu of 
the applicable mortality table under section 417(e)(3) that would apply 
to a distribution with an annuity starting date occurring on the 
valuation date.
    In addition, under this special computation, the valuation interest 
rates under section 430(h)(2) are used for purposes of discounting the 
projected annuity payments from their expected payment dates to the 
valuation date (rather than the interest rates under section 417(e)(3) 
which the plan uses to determine the amount of the benefit).
    However, a plan is permitted to make adjustments to the interest 
rates in order to reflect differences between the phase-in of the 
section 430(h)(2) segment rates under section 430(h)(2)(G) and the 
adjustments to the segment rates under section 417(e)(3)(D)(iii).
    The proposed regulations would have provided that, in the case of a 
distribution that is subject to section 417(e)(3) but is determined as 
the greater of the benefit determined using the assumptions required 
under section 417(e)(3) and some other actuarial basis, the computation 
of present value must take into account the extent to which the present 
value of the distribution is greater than the present value determined 
using this annuity substitution method. Commenters requested a similar 
rule where the value of the distribution is lower because of the use of 
different actuarial assumptions that are not more favorable, citing the 
situation where section 415 may require the use of less favorable 
actuarial assumptions. In response to these concerns, the final 
regulations provide that, if a distribution that is subject to section 
417(e)(3) is determined on a basis other than using the applicable 
interest rates and the applicable mortality table under section 
417(e)(3), then the computation of present value must take into account 
the extent to which the present value of the distribution is different 
from the present value determined using this annuity substitution 
method.
    As under the proposed regulations, the final regulations provide 
that, in the case of an applicable defined benefit plan described in 
section 411(a)(13)(C), the amount of a future distribution is based on 
the amount determined by projecting the future interest credits or 
equivalent amounts under the plan's interest crediting rules using 
actuarial assumptions that satisfy the requirements of the regulations. 
Thus, the present value of a future distribution is not necessarily the 
current amount of a participant's hypothetical account balance. 
Commenters requested that various safe harbors be provided for making 
this determination. The IRS and the Treasury Department believe that 
this determination should be made using the actuary's best estimate of 
the projected future interest credits, and that the use of broadly 
applicable safe harbors for this purpose is not appropriate.
    In the case of a single-sum distribution determined under the rules 
of section 411(a)(13)(A), the amount of the future distribution is 
equal to the projected account balance at the expected date of payment 
calculated in accordance with the regulations. In the case of a 
distribution determined as an annuity, the regulations provide that the 
amount of the future distribution must be determined by converting the 
projected account balance to an annuity using the plan's annuity 
conversion provisions and actuarial assumptions that satisfy the 
requirements of the regulations.
    The regulations provide that, if the plan bases the conversion of 
the projected account balance to an annuity using the applicable 
interest rates and applicable mortality table under section 417(e)(3), 
the future annuity is determined by dividing the projected account 
balance (or accumulated percentage of final average compensation) by an 
annuity factor corresponding to the assumed form of payment using, for 
the period beginning with the annuity starting date, the current 
applicable mortality table under section 417(e)(3) that would apply to 
a distribution with an annuity starting date occurring on the valuation 
date (in lieu of the mortality table under section 430(h)(3) that would 
otherwise be used) and the valuation interest rates under section 
430(h)(2) (as opposed to the interest rates under section 417(e)(3) 
which the plan uses to determine the amount of the benefit). In 
determining the amount of a future annuity for this purpose, if a plan 
uses the generational mortality tables under Sec.  1.430(h)(3)-1(a)(4) 
or Sec.  1.430(h)(3)-2, the plan is permitted to use a 50-50 male-
female blend of the annuitant mortality rates under the Sec.  
1.430(h)(3)-1(a)(4) generational mortality tables in lieu of the 
applicable mortality table under section 417(e)(3) that would apply to 
a distribution with an annuity starting date occurring on the valuation 
date. In the case of a plan that determines an annuity under the 
regulations using a variable interest rate or rates other than the 
applicable interest rates under section 417(e)(3), the amount of the 
annuity must be based on actuarial assumptions that satisfy the 
requirements of the regulations.
    Some commenters maintained that unpredictable contingent event 
benefits should not be taken into account for minimum funding purposes 
before the occurrence of the unpredictable contingent event. The final 
regulations provide that any determination of present value or any 
other computation under this section must take into account, based on 
information as of the valuation date, the probability that future 
benefits (or increased benefits) under the plan will become payable due 
to the occurrence of an unpredictable contingent event (as described in 
Sec.  1.436-1(j)(9)). However, if, as of the valuation date, the 
likelihood of the occurrence of the event is de minimis, the 
regulations permit the use of a zero probability of the occurrence of 
the event.
    The regulations provide that any reasonable technique can be used 
to determine the present value of the benefits expected to be paid 
during a plan year, based on the interest rates and mortality 
assumptions applicable for the plan year. For example, the present 
value of a monthly retirement annuity payable at the beginning of each 
month can be determined using estimating techniques such as the 
standard actuarial approximation that reflects 13/24ths of the 
discounted expected payments for the year as of the beginning of the 
year and 11/24ths of the discounted expected payments for the year as 
of the end of the year; or by assuming that the payment is made in

[[Page 53013]]

the middle of the year. In the case of a participant for whom there is 
a less than 100 percent probability that the participant will terminate 
employment during the plan year, for purposes of determining the 
benefits expected to accrue, be earned, or otherwise allocated to 
service during the plan year (which are used to determine the target 
normal cost), it is permissible to assume the participant will not 
terminate during the plan year, unless using this method of calculation 
would be unreasonable.
    Like the proposed regulations, the final regulations reflect the 
provisions of section 430(h)(5), requiring approval of the Commissioner 
for changes in actuarial assumptions for certain large plans. Under the 
regulations, except as otherwise provided, any change in actuarial 
assumptions used to determine a plan's funding target for a plan year 
cannot be changed from the actuarial assumptions that were used for the 
preceding year without the approval of the Commissioner if the plan is 
sponsored by a member of a controlled group which maintains plans with 
over $50 million in unfunded vested benefits and the change in 
assumptions results in a decrease in the plan's funding shortfall 
(within the meaning of section 430(c)(4)) for the current plan year 
(disregarding the effect on the plan's funding shortfall resulting from 
changes in interest and mortality assumptions) that exceeds 
$50,000,000, or that exceeds $5,000,000 and is 5 percent or more of the 
funding target of the plan before such change.
    The proposed regulations did not contain an exception to this rule 
for a plan exiting at-risk status. Commenters maintained that a plan 
exiting at-risk status should be able to resume use of its previously 
used actuarial assumptions without obtaining the Commissioner's 
approval. To address these concerns, the final regulations provide that 
a plan that is not in at-risk status for the current plan year and that 
was in at-risk status for the prior plan year (but not for a period of 
5 or more consecutive plan years) is granted automatic approval to use 
the actuarial assumptions that were applied before the plan entered at-
risk status and that were used in combination with the required at-risk 
assumptions during the period the plan was in at-risk status.
    These regulations provide automatic approval for changes in funding 
method for the first plan year section 430 applies to determine the 
minimum required contribution for the plan (the first plan year 
beginning in 2008, or a later year for plans described in sections 104 
through 106 of PPA '06). The regulations also provide automatic 
approval for changes in funding method for the first plan year that a 
plan applies all the provisions of the regulations under section 
430(d), section 430(f), section 430(g), section 430(i), and section 436 
(which could be the first plan year beginning on or after January 1, 
2010 or an earlier plan year). Thus, a plan can receive automatic 
approval for a change in funding method for the first plan year 
beginning on or after January 1, 2009, if it applies all of these 
regulation provisions, without regard to whether it applies the 
provisions of Sec.  1.430(h)(2)-1 for that plan year. In addition, the 
regulations provide automatic approval for a change of funding method 
that is necessary to reflect the new allocation rules for benefits 
under Sec.  1.430(d)-1(c)(1)(ii).

III. Section 1.430(f)-1 Effect of Prefunding Balance and Funding 
Standard Carryover Balance

    Section 1.430(f)-1 of these regulations provides rules relating to 
the application of prefunding and funding standard carryover balances 
under section 430(f). The regulations generally adopt the rules that 
were set forth in the corresponding proposed regulations.
    Subject to the limitations otherwise provided, the regulations 
provide that in the case of any plan year with respect to which the 
plan sponsor elects to use all or a portion of the prefunding balance 
or the funding standard carryover balance to offset the minimum 
required contribution for the plan year, the minimum required 
contribution for the plan year (determined after taking into account 
any waiver under section 412(c)) is offset as of the valuation date for 
the plan year by the amount so used. The regulations also provide rules 
that apply where the plan sponsor elects to use all or a portion of the 
prefunding balance or the funding standard carryover balance to satisfy 
the requirement to make quarterly contributions under section 430(j)(3) 
that are due after the valuation date. Rules with respect to use of the 
prefunding balance or funding standard carryover balance to satisfy 
quarterly contribution requirements with respect to installments due 
before the valuation date are expected to be addressed in future 
proposed regulations.
    Under the regulations, a plan sponsor is permitted to elect to 
maintain a prefunding balance for a plan. A prefunding balance 
maintained for a plan consists of a beginning balance of zero, 
increased by the amount of excess contributions to the extent the 
employer elects to do so, and decreased (but not below zero) by the sum 
of, as of the first day of a plan year, any amount of the prefunding 
balance that was used to offset the minimum required contribution of 
the plan for the preceding plan year and any reduction in the 
prefunding balance for the plan year. The plan sponsor's initial 
election to add to the prefunding balance constitutes an election to 
maintain a prefunding balance (so that no special election is necessary 
to establish a prefunding balance). The prefunding balance is adjusted 
further for actual investment return for the plan year.
    The regulations provide that if the plan sponsor elects to add to 
the plan's prefunding balance, as of the first day of a plan year, the 
prefunding balance is increased by the amount so elected by the plan 
sponsor. The amount added to the prefunding balance cannot exceed the 
present value of the excess contribution for the preceding plan year 
increased for interest.
    The present value of the excess contribution for the preceding plan 
is the excess, if any, of the present value of the employer 
contributions (other than contributions to avoid or terminate section 
436 benefit limitations) to the plan for such preceding plan year over 
the minimum required contribution for such preceding plan year. In 
addition, a contribution for a plan year to correct an unpaid minimum 
required contribution for a prior plan year is not treated as part of 
the present value of excess contributions. This present value is 
increased with interest from the valuation date for the preceding plan 
year to the first day of the current plan year. The regulations provide 
that the plan's effective interest rate under section 430(h)(2)(A) for 
the preceding plan year is generally used to calculate the present 
value of the contributions for the preceding plan year and for 
adjusting the excess amount.
    The proposed regulations would have prohibited an employer from 
adding to the prefunding balance any amount of contributions that are 
excess contributions for a plan year solely by reason of a reduction in 
the minimum required contribution for the year through the use of the 
prefunding balance or funding standard carryover balance. This rule was 
intended to preclude an employer from avoiding the requirement to 
adjust the prefunding balance and funding standard carryover balance by 
the actual rate of return on plan assets in the situation where the 
plan assets have experienced a loss (or a rate of return that is lower 
than the effective interest rate that is used for interest adjustment 
with respect to minimum required contributions for the plan year). 
Commenters argued that this rule was unwarranted and would

[[Page 53014]]

prevent plan sponsors from adding excess contributions to the 
prefunding balance in situations where balance amounts were used to 
offset minimum contributions earlier for reasons other than interest 
arbitrage. The final regulations permit an excess contribution to be 
added to the prefunding balance for a plan year notwithstanding that 
the amount is an excess contribution solely because an election is made 
for that plan year to use the funding standard carryover balance or 
prefunding balance to offset minimum required contributions (or 
required installments), but provide that the interest adjustment with 
respect to such a contribution is made using the plan's actual 
investment experience for the plan year, rather than the effective 
interest rate under section 430(h)(2)(A). Thus, the funding standard 
carryover balance and prefunding balance are adjusted with the plan's 
actual investment return when the balances are not actually used to 
satisfy the minimum contribution requirement for a plan year, 
regardless of whether the plan sponsor makes an election to use the 
balance to offset the minimum contribution requirement and subsequently 
replenishes the prefunding balance.
    The proposed regulations would have provided that the plan sponsor 
is permitted to maintain a funding standard carryover balance for a 
plan that had a positive balance in the funding standard account under 
section 412(b) (as in effect prior to PPA '06) as of the end of the 
plan's pre-effective plan year (the plan year immediately preceding the 
first plan year that section 430 applies for purposes of determining 
the minimum required contribution for the plan). Some commenters 
suggested that no formal election should be required in order to 
maintain a funding standard carryover balance. In response, the 
regulations provide that a funding standard carryover balance is 
automatically established for a plan that had a positive balance in the 
funding standard account under section 412(b) (as in effect prior to 
PPA '06) as of the end of the pre-effective plan year for the plan. A 
plan sponsor that does not wish to have the funding standard carryover 
balance established can elect to reduce it to zero.
    The final regulations provide that the plan's funding standard 
carryover balance as of the beginning of the first effective plan year 
(the first plan year beginning on or after the date section 430 applies 
for purposes of determining the minimum required contribution for the 
plan) is the positive balance in the funding standard account under 
section 412(b) (as in effect prior to PPA '06) as of the end of the 
pre-effective plan year for the plan. For subsequent plan years, the 
funding standard carryover balance is decreased (but not below zero) by 
the sum of, as of the first day of each plan year, any amount of the 
funding standard carryover balance that was used to offset the minimum 
required contribution of the plan for the preceding plan year and any 
reduction in the funding standard carryover balance for the plan year. 
The regulations also provide that the funding standard carryover 
balance is adjusted further to reflect the actual rate of return on 
plan assets for the preceding plan year.
    For both the funding standard carryover balance and the prefunding 
balance, the regulations provide that the adjustment for investment 
return is applied to the balance as of the beginning of the preceding 
plan year after subtracting amounts used to offset the minimum required 
contribution for the preceding plan year and after any reduction of 
balances for that preceding plan year. For this purpose, the actual 
rate of return on plan assets for the preceding plan year is determined 
on the basis of fair market value and must take into account the amount 
and timing of all contributions, distributions, and other plan payments 
made during that period.
    If a plan's valuation date is not the first day of the plan year, 
then, for purposes determining a plan's prefunding balance and funding 
standard carryover balance as of the valuation date, the plan's 
prefunding balance and funding standard carryover balance (if any) are 
increased to the valuation date using the plan's effective interest 
rate under section 430(h)(2)(A) for the plan year. Any elections to 
reduce the prefunding balance and funding standard carryover balance, 
to use the prefunding balance and funding standard carryover balance to 
offset the minimum required contribution for the year, or to add to the 
prefunding balance occur as of the valuation date for the plan year. 
After the elections are applied as of the valuation date, the resulting 
amount of the prefunding balance and funding standard carryover balance 
is adjusted to the first day of the plan year (discounted using the 
effective interest rate under section 430(h)(2)(A) for that year) 
before applying the adjustments for investment experience for the plan 
year.
    The regulations provide that, in the case of any plan with a 
prefunding balance or a funding standard carryover balance, the amount 
of those balances must be subtracted from the value of plan assets for 
purposes of sections 430 and 436, except as otherwise provided in the 
regulations. For purposes of determining whether a plan is exempt from 
the requirement to establish a new shortfall amortization base under 
section 430(c)(5), the amount of the prefunding balance is subtracted 
from the value of plan assets only if an election to use all or any 
portion of the prefunding balance to offset the minimum required 
contribution is made for the plan year. In addition, for this purpose, 
the funding standard carryover balance is not subtracted from the value 
of plan assets regardless of whether any portion of either the funding 
standard carryover balance or the prefunding balance is used to offset 
the minimum required contribution for the plan year.
    If there is in effect for a plan year a binding written agreement 
with the Pension Benefit Guaranty Corporation (PBGC) which provides 
that all or a portion of the prefunding balance or funding standard 
carryover balance (or both balances) is not available to offset the 
minimum required contribution for a plan year, the regulations provide 
that the specified amount is not subtracted from the value of plan 
assets for purposes of determining the funding shortfall under section 
430(c)(4). For this purpose, an agreement with the PBGC is taken into 
account with respect to a plan year only if the agreement was executed 
prior to the valuation date for the plan year.
    To address questions raised by commenters, the final regulations 
provide ordering rules regarding the application of use and reduction 
elections with respect to prefunding and funding standard carryover 
balances. The regulations provide that the amount of prefunding balance 
or funding standard carryover balance that may be used to offset the 
minimum required contribution for the plan year must take into account 
any decrease in those balances which result from a prior election 
either to use the prefunding balance or funding standard carryover 
balance under section 430(f) or to reduce those balances under section 
430(f) (including deemed elections under section 436(f)(3) and Sec.  
1.436-1(a)(5)).
    The regulations describe the application of the ordering rules of 
section 430(f)(5)(A). Under these rules, an election to reduce the 
funding standard carryover balance or prefunding balance is deemed to 
occur on the valuation date for the plan before any election to use the 
balance to offset the minimum required contribution for the current 
year. Thus, if an election to use the prefunding balance or funding

[[Page 53015]]

standard carryover balance to offset the minimum required contribution 
for the plan year (including an election to satisfy the quarterly 
contribution requirement) has been made prior to the election to reduce 
the prefunding balance or funding standard carryover balance, then the 
amount available for use to offset the otherwise applicable minimum 
required contribution for the plan year will be retroactively reduced 
and may result in a missed quarterly contribution.
    If an election is made to reduce the prefunding balance or funding 
standard carryover balance or to use the prefunding balance or funding 
standard carryover balance to offset the minimum required contribution 
with respect to a plan year, a special rule applies to determine the 
amount of remaining prefunding balance or funding standard carryover 
balance that may be used to offset the minimum required contribution 
for the prior plan year. Under this special rule, an election to reduce 
the prefunding balance or the funding standard carryover balance that 
is made with respect to the later plan year is taken into account by 
decreasing the funding standard carryover balance or prefunding balance 
as of the valuation date for the prior plan year by the prior plan year 
equivalent of the current year election. The prior plan year equivalent 
of the current year election is determined by dividing the amount of 
the current year election by a number equal to 1 plus the rate of 
investment return for the prior plan year. The funding standard 
carryover balance and prefunding balance are nonetheless adjusted in 
accordance with the rules described above, after adjusting for all 
elections for that prior year. Thus, the amount used to offset the 
minimum required contribution for the earlier plan year is subtracted 
from the prefunding balance or funding standard carryover balance as of 
the valuation date for that year prior to the adjustment for investment 
return for that plan year, and the amount by which the prefunding 
balance or funding standard carryover balance is decreased for the 
second year is based on the elections made for the second year.
    Accordingly, under the final regulations, a prefunding balance or a 
funding standard carryover balance is maintained in a manner that 
tracks the way the balances are reported on Schedule SB, ``Single-
Employer Defined Benefit Plan Actuarial Information'' of Form 5500, 
``Annual Return/Report of Employee Benefit Plan''. Thus, the balances 
at the beginning of the year are increased (by investment experience or 
by addition to the prefunding balance) or decreased (by elections to 
use or reduce the balances or by investment experience) at the first 
day of the next plan year. These increases and decreases are made 
before any elections (whether made or deemed) are applied for the next 
plan year.
    To the extent that a plan has a funding standard carryover balance 
greater than zero, the regulations provide that no amount of the plan's 
prefunding balance may be used to offset the minimum required 
contribution. Thus, a plan's funding standard carryover balance must be 
exhausted before the plan's prefunding balance may be used to offset 
the minimum required contribution.
    The regulations provide that an election to use the prefunding 
balance or funding standard carryover balance to offset the minimum 
required contribution is not available for a plan year if the plan's 
prior plan year funding ratio is less than 80 percent. The plan's prior 
plan year funding ratio generally is equal to the fraction (expressed 
as a percentage), the numerator of which is the value of plan assets on 
the valuation date for the preceding plan year, reduced by the amount 
of any prefunding balance (but not the amount of any funding standard 
carryover balance), and the denominator of which is the funding target 
of the plan for the preceding plan year (determined without regard to 
the at-risk rules of section 430(i)(1)).
    If the prior plan year was the first year of a new plan and the 
funding target for the prior plan year was zero, the regulations 
provide that the prior plan year's funding ratio is deemed to be 80 
percent for purposes of this limitation on the use of the prefunding or 
funding standard carryover balances. Thus, the sponsor of a new plan 
that has no funding target in its first year can use a prefunding 
balance that resulted from first year contributions in excess of the 
target normal cost in order to offset the otherwise minimum required 
contribution in the second year of the plan. Commentators requested 
rules with respect to plan mergers and spin-offs. The IRS and the 
Treasury Department expect to address these issues in future proposed 
regulations.
    The regulations provide that a plan sponsor may make an election 
for a plan year to reduce any portion of a plan's prefunding balance 
and funding standard carryover balance. If such an election is made, 
the amount of those balances that must be subtracted from the value of 
plan assets will be smaller and, accordingly, the value of plan assets 
taken into account for purposes of sections 430 and 436 will be larger. 
This election to reduce a plan's prefunding balance and funding 
standard carryover balance is taken into account in the determination 
of plan assets for the plan year and applies for all purposes under 
sections 430 and 436, including for purposes of determining the plan's 
prior plan year funding ratio for the following plan year. Section 
436(f)(3) and Sec.  1.436-1(a)(5) provide a rule under which the plan 
sponsor is deemed to make this election. To the extent that a plan has 
a funding standard carryover balance greater than zero, no election is 
permitted to be made that reduces the plan's prefunding balance. Thus, 
a plan must exhaust its funding standard carryover balance before it is 
permitted to make an election to reduce its prefunding balance.
    Like the proposed regulations, these regulations provide that any 
election under this section by the plan sponsor must be made by 
providing written notification of the election to the plan's enrolled 
actuary and the plan administrator. The written notification must set 
forth the relevant details of the election, including the specific 
dollar amounts involved in the election. Thus, a conditional or 
formula-based election generally does not satisfy the requirements.
    The final regulations provide rules regarding the timing of 
elections to use or reduce the prefunding balance or funding standard 
carryover balance that are generally the same as under the proposed 
regulations. Under the final regulations, any election to add to the 
prefunding balance or to use the prefunding balance or funding standard 
carryover balance to offset the minimum required contribution for a 
plan year must be made no later than the last date for making the 
minimum required contribution for the plan year as described in section 
430(j)(1). Any election to reduce the prefunding balance or funding 
standard carryover balance for a plan year (for example, in order to 
avoid a benefit restriction under section 436) must be made by the end 
of the plan year to which the election relates. These timing rules 
establish the latest date that an election can be made. An employer is 
permitted to make an earlier election, and, in certain circumstances, 
may need to make such an earlier election in order to timely satisfy a 
quarterly contribution requirement under section 430(j).
    In response to comments received on the desirability of standing 
elections, the final regulations permit a plan sponsor to provide a 
standing election in writing to the plan's enrolled actuary to use the 
funding standard carryover balance and the prefunding balance to

[[Page 53016]]

the extent needed to avoid an unpaid minimum required contribution 
under section 4971(c)(4) taking into account any contributions that are 
or are not made. In addition, the regulations allow a plan sponsor to 
provide a standing election in writing to the plan's enrolled actuary 
to add the maximum amount possible each year to the prefunding 
balance.\5\ Any election made pursuant to a standing election is deemed 
to occur on the last day available to make the election for the plan 
year. The regulations provide that any standing election remains in 
effect for the plan with respect to the enrolled actuary named in the 
election, unless the standing election is revoked by notice to the 
plan's enrolled actuary and the plan administrator on or before the 
date the corresponding election is deemed to occur, or the plan's 
enrolled actuary who signs the Schedule SB is not the enrolled actuary 
named in the standing election. If there is a change in enrolled 
actuary for the plan year which would result in a revocation of the 
standing election, then the plan sponsor may reinstate the revoked 
standing election by providing a replacement to the new enrolled 
actuary by the due date of the Schedule SB of Form 5500.
---------------------------------------------------------------------------

    \5\ The regulations do not provide for a standing election to be 
made with respect to quarterly contributions. The issue of standing 
elections with respect to quarterly contributions will be considered 
in conjunction with future regulations regarding quarterly 
contributions.
---------------------------------------------------------------------------

    In general, a plan sponsor's election with respect to the plan's 
prefunding balance or funding standard carryover balance is irrevocable 
(and must be unconditional). However, an election to use the prefunding 
balance or funding standard carryover balance to offset the minimum 
required contribution for a plan year (including an election to satisfy 
the quarterly contribution requirements for a plan year) is permitted 
to be revoked to the extent the amount the plan sponsor elected to use 
to offset the minimum contribution requirements exceeds the minimum 
required contribution for a plan year (determined without regard to the 
offset), if and only if the election is revoked by providing written 
notification of the revocation to the plan's enrolled actuary and the 
plan administrator by the end of the plan year (or, for plans with a 
valuation date other than the first day of the plan year, the deadline 
for contributions for the plan year as described in section 430(j)(1)). 
The final regulations defer the deadline for making this revocation for 
the first plan year beginning in 2008 until the due date (including 
extensions) of the Schedule SB, ``Single-Employer Defined Benefit Plan 
Actuarial Information'' of Form 5500, ``Annual Return/Report of 
Employee Benefit Plan.'' Thus, a plan sponsor that made an election to 
use the funding standard carryover balance for the first plan year 
beginning in 2008 to offset the minimum required contribution for that 
plan year determined prior to the enactment of WRERA '08 has an 
opportunity to revoke that election to the extent it exceeds the 
minimum required contribution for that plan year taking into account 
WRERA '08. However, plan sponsors should note that any such revocation 
made after the enrolled actuary has certified the AFTAP for the plan 
year, could result in a change in the AFTAP for that plan year, which 
could be a material change. If such an excess election is not timely 
revoked, it has the same effect as an election to reduce the applicable 
balance to the extent of the excess.
    The proposed regulations provided a transition rule for determining 
a plan's funding ratio for the pre-effective plan year (that is, the 
plan's prior year funding ratio with respect to the plan's first 
effective plan year). These regulations adopt this transition rule, but 
limit its application to the 2007 plan year (rather than apply it to a 
later plan year for a plan described in sections 104 through 106 of PPA 
'06). Under the regulations, a plan's funding ratio for the plan year 
preceding the first plan year beginning on or after January 1, 2008 
(the ``2007 plan year'') is generally the same as the computation of 
FTAP for the 2007 plan year. However, the assets are determined without 
subtracting the funding standard account balance from the plan assets.

IV. Section 1.430(g)-1 Valuation Date and Valuation of Plan Assets

    Section 1.430(g)-1 provides rules relating to a plan's valuation 
date and the valuation of a plan's assets for a plan year under section 
430(g). The rules under the regulations relating to valuation dates do 
not reflect significant changes from those under the proposed 
regulations. The regulations provide that the determination of the 
funding target, target normal cost, and value of plan assets for a plan 
year is made as of the valuation date of the plan for that plan year.
    Except in the case of a small plan, the valuation date of a plan 
for any plan year is the first day of the plan year. For this purpose, 
a small plan is defined as a plan that, on each day during the 
preceding plan year, had 100 or fewer participants (including active 
and inactive participants and all other individuals entitled to future 
benefits). For purposes of making this determination, all defined 
benefit plans (other than multiemployer plans as defined in section 
414(f)) maintained by an employer or members of the controlled group 
are treated as one plan, but only participants with respect to that 
employer are taken into account. The regulations provide that, in the 
case of the first plan year of any plan, this exception for small plans 
is applied by taking into account the number of participants that the 
plan is reasonably expected to have on each day during the first plan 
year.
    The regulations provide that the selection of a plan's valuation 
date is part of the plan's funding method and, accordingly, may only be 
changed with the consent of the Commissioner. However, a change of a 
plan's valuation date that is required by section 430 is treated as 
having been approved by the Commissioner and does not require the 
Commissioner's prior specific approval.
    Under the regulations, the value of plan assets for purposes of 
section 430 is determined in one of two ways: As the fair market value 
of plan assets on the valuation date, or as the average of the fair 
market values of assets on the valuation date and the adjusted fair 
market value of assets determined for one or more earlier determination 
dates, subject to a 90 to 110 percent corridor. The method of 
determining the value of assets is part of the plan's funding method 
and, accordingly, may only be changed with the consent of the 
Commissioner.
    The regulations provide that the fair market value of an asset is 
determined as the price at which the asset would change hands between a 
willing buyer and a willing seller, neither being under any compulsion 
to buy or sell and both having reasonable knowledge of relevant facts. 
Except as otherwise provided by the Commissioner, any guidance on the 
valuation of insurance contracts under Subchapter D of Chapter 1 of the 
Internal Revenue Code applies for purposes of the regulations. Such 
guidance has been issued in Revenue Procedure 2005-25 (2005-1 CB 962) 
and Revenue Procedure 2006-13 (2006-1 CB 315). See Sec.  601.601(d)(2) 
relating to objectives and standards for publishing regulations, 
revenue rulings and revenue procedures in the Internal Revenue 
Bulletin.
    The regulations provide rules for the treatment of contributions 
that are made after the valuation date for a plan year that are 
attributable to a prior plan year. These rules are generally the same 
as under the proposed regulations. Under these rules, only the present 
value of the contributions (discounted using the

[[Page 53017]]

effective interest rate for the prior plan year) is included in the 
value of plan assets. The final regulations clarify that a contribution 
for a prior plan year is taken into account only if the contribution is 
made by the deadline for contributions for the immediately preceding 
plan year under section 430(j). However, for the first plan year that 
begins on or after January 1, 2008, any such prior plan year 
contribution is taken into account at the full value without a present 
value discount, provided it is made by the deadline for contributions 
under section 412(c)(10), as in effect before amendment by PPA '06.
    The regulations also provide rules for the treatment of a 
contribution that is made before the valuation date of the plan year to 
which it is attributable. Such a contribution (and any interest on the 
contribution for the period between the contribution date and the 
valuation date, determined using the effective interest rate under 
section 430(h)(2)(A) for the plan year) must be subtracted from plan 
assets in determining the value of plan assets as of the valuation 
date. If the result of this subtraction is a number less than zero, the 
value of plan assets as of the valuation date is equal to zero.
    Subject to the plan asset corridor rules, a plan is permitted to 
determine the value of plan assets on the valuation date as the average 
of the fair market value of assets on the valuation date and the 
adjusted fair market value of assets determined for one or more earlier 
determination dates. The regulations require that the period of time 
between each determination date (treating the valuation date as a 
determination date) must be equal and that the period of time cannot 
exceed 12 months. In addition, the earliest determination date with 
respect to a plan year cannot be earlier than the last day of the 25th 
month before the valuation date of the plan year (or a similar period 
in the case of a valuation date that is not the first day of a month). 
In a typical situation, the earlier determination dates will be the two 
immediately preceding valuation dates. However, these rules also permit 
the use of more frequent determination dates (for example, monthly or 
quarterly determination dates).
    The regulations provide that the adjusted fair market value of plan 
assets for a prior determination date is the fair market value of plan 
assets on that date, increased for contributions included in the plan's 
asset balance on the valuation date that were not included in the 
plan's asset balance on the earlier determination date, reduced for 
benefits and all other amounts paid from plan assets during the period 
beginning with the prior determination date and ending immediately 
before the valuation date, and adjusted for expected earnings. The fair 
market value of assets as of a determination date includes any 
contribution for a plan year that ends with or prior to the 
determination date that is receivable as of the determination date (but 
only if the contribution is actually made within 8\1/2\ months after 
the end of the applicable plan year). For this purpose, the present 
value of a contribution receivable for the applicable plan year is 
determined using the effective interest rate under section 430(h)(2)(A) 
for the applicable plan year. For purposes of determining the value of 
plan assets for the first plan year that begins in 2008, if the plan 
sponsor makes a contribution to the plan after the valuation date for 
that plan year but by the deadline for contributions under section 
412(c)(10) as in effect before the effective date of PPA '06 and the 
contribution is for the preceding plan year, then the contribution is 
taken into account as a plan asset without applying any present value 
discount.
    The final regulations provide that, for purposes of determining the 
adjusted fair market value of plan assets, assets spun off from a plan 
as a result of a spin-off described in Sec.  1.414(l)-1(b)(4) are 
treated as an amount paid from plan assets. In addition, except as 
otherwise provided by the Commissioner, for purposes of this 
determination, assets that are added to a plan as a result of a plan-
to-plan transfer are treated in the same manner as contributions. It is 
expected that future proposed regulations will provide additional 
rules, including rules relating to plan mergers.
    The regulations provide that if the value of plan assets determined 
under the averaging method would otherwise be less than 90 percent of 
the fair market value of plan assets, then the value of plan assets is 
equal to 90 percent of the fair market value of plan assets. If the 
value of plan assets determined under the averaging method would 
otherwise be greater than 110 percent of the fair market value of plan 
assets, then the value of plan assets is equal to 110 percent of the 
fair market value of plan assets. The rules for accounting for 
contribution receipts are applied prior to the application of this 90 
to 110 percent corridor.
    To reflect changes to the rules regarding determination of average 
plan assets made by WRERA '08, portions of the regulations have been 
reserved to provide rules regarding adjustments for expected earnings 
that are applied in determining average plan assets. These issues are 
expected to be addressed in future proposed regulations. In the 
interim, Notice 2009-22 (2009-14 IRB 741) provides guidance regarding 
these issues. See Sec.  601.601(d)(2) relating to objectives and 
standards for publishing regulations, revenue rulings and revenue 
procedures in the Internal Revenue Bulletin. As provided under that 
guidance, the final regulations permit the use of an assumed earnings 
rate of zero for purposes of determining the actuarial value of assets 
for a plan year beginning during 2008 using the averaging rules (even 
if zero is not the actuary's best estimate of the anticipated annual 
rate of return on plan assets).
    The regulations provide that any change in a plan's valuation date 
or asset valuation method that is made for the first plan year 
beginning in 2008, the first plan year beginning in 2009, or the first 
plan year beginning in 2010 is automatically approved and does not 
require the Commissioner's specific prior approval. In addition, the 
regulations provide that a change in a plan's valuation date or asset 
valuation method for the first plan year to which section 430 applies 
to determine the plan's minimum required contribution (even if that 
plan year begins after December 31, 2010) that satisfies the 
requirements of the regulations is automatically approved and does not 
require the Commissioner's specific prior approval.

V. Section 1.430(h)(2)-1 Interest Rates Used To Determine Present Value

    Section 1.430(h)(2)-1 provides rules relating to the interest rates 
used in determining the present value of the benefits that are included 
in the target normal cost and the funding target for the plan for a 
plan year. These rules follow the rules set forth in the proposed 
regulations except for a few changes that are noted in this preamble.
    The interest rates used under the regulations are generally based 
on the 24-month moving averages of 3 separate segment rates for the 
month that includes the valuation date (which are determined based on 
the monthly corporate bond yield curves for the preceding 24 months). 
The first segment rate, which is based on the portion of the corporate 
bond yield curve over the period from 0 to 5 years, applies for 
purposes of discounting benefits that are expected to be paid during 
the 5-year period beginning on the valuation date for the plan year in 
the case of a plan with a beginning of year valuation date. The second 
segment rate, which is based on the portion of the corporate

[[Page 53018]]

bond yield curve over the period between 5 and 20 years, applies for 
purposes of discounting benefits that are expected to be paid within 15 
years after that initial 5 year-period. The third segment rate, which 
is based on the portion of the corporate bond yield curve over the 
period between 20 years and 60 years, applies to benefit payments that 
are expected to be paid after the 20-year period. For example, if a 
series of monthly payments is assumed to be made beginning on the 
valuation date, the second segment rate will apply beginning with the 
61st such payment and the third segment rate will apply beginning with 
the 241st such payment. Except in the case of a new plan, a transition 
rule applies for plan years beginning in 2008 and 2009 under which 
these segment rates are blended with the long-term corporate bond rate 
that applies under pre-PPA '06 law.
    The monthly corporate bond yield curve is, with respect to any 
month, a yield curve that is prescribed by the Commissioner for that 
month based on yields for that month on investment grade corporate 
bonds with varying maturities that are in the top three quality levels 
available. Notice 2007-81 (2007-2 CB 899) provides guidance on the 
monthly corporate bond yield curve and the related first, second, and 
third segment rates, including a description of the methodology for 
determining the monthly corporate bond yield curve. See Sec.  
601.601(d)(2) relating to objectives and standards for publishing 
regulations, revenue rulings and revenue procedures in the Internal 
Revenue Bulletin.
    The proposed regulations would have used the rules for applying the 
first segment rate as stated in this preamble to all plans, regardless 
of the valuation date for the plan. Some commenters noted that section 
430(h)(2)(B)(i) applies the first segment rates to benefits expected to 
be paid in the 5 years from the beginning of the plan year rather than 
the valuation date. These commenters argued that the regulations should 
likewise base the period to which the first segment rate applies on the 
beginning of the plan year rather than the valuation date. The IRS and 
the Treasury Department continue to believe that the position set forth 
in the proposed regulations remains the best method of valuing assets 
and liabilities as of the valuation date. Accordingly, the final 
regulations reserve the issue of guidance on the interest rates to be 
used by plans with valuation dates other than the first day of the plan 
year. A technical correction to the statute may address this in the 
future.
    The regulations reflect the special interest rate for determining a 
plan's funding target in the case of airlines that make the 10-year 
amortization election described in section 402(a)(2) of PPA '06, in 
accordance with section 6615 of the U.S. Troop Readiness, Veterans' 
Care, Katrina Recovery, and Iraq Accountability Appropriations Act, 
2007, Public Law 110-28 (121 Stat. 112). This special interest rate 
does not apply for other purposes such as the determination of the 
plan's target normal cost.
    The regulations provide for elections that a plan sponsor can make 
to use alternative interest rates rather than the segment rates for the 
month that includes the valuation date. These elections are made by 
providing written notification of the election to the plan's enrolled 
actuary. These elections may be adopted for a plan year without 
obtaining the consent of the Commissioner but, once adopted, they will 
apply for that plan year and all future plan years and may be changed 
only with the consent of the Commissioner. Under one such election, a 
plan sponsor that is using segment rates may elect the use of an 
alternative month as the applicable month, provided that the 
alternative month is one of the 4 months preceding that month that as 
the applicable month. In such a case, the segment rates for an 
applicable month are based upon data through the end of the immediately 
preceding month. Under another election, for purposes of determining 
the funding target, target normal cost, shortfall amortization 
installments, waiver amortization installments, and the present value 
of those installments, the plan sponsor may elect to use interest rates 
under the monthly corporate bond yield curve--which is a set of spot 
rates for the month preceding the valuation date rather than a 24-month 
moving average for that month--in lieu of the segment rates. The target 
normal cost and funding target determined using the monthly corporate 
bond yield curve will also be used for purposes of sections 404 and 
436.
    Some commenters have maintained that the rules under which an 
applicable month earlier than the month before the valuation date can 
be used should be permitted to be applied when the plan sponsor elects 
to use the monthly corporate bond yield curve. The IRS and the Treasury 
Department believe that, while this is a reasonable interpretation of 
the statute, the better view is that this option should not be 
available when the plan elects to use the monthly corporate bond yield 
curve. Accordingly, this interpretation can be used for plan years 
beginning during 2008 and 2009 (so, for example, for a plan year 
beginning on January 1, 2009, the plan sponsor could elect to use the 
monthly corporate bond yield curve for September, October, November 
2008, or December 2008, or January 2009, based on data for that month), 
but such an election is not permitted for plan years beginning on or 
after the regulations become effective.
    The proposed regulations would have required plan sponsors to 
obtain approval for an election to use alternative interest rates as 
described above that is made for a plan year after the first plan year 
for which section 430 applies to the plan. Some commenters argued that 
the statute permits these elections to be made without approval, with 
approval required only for a later change or revocation of election. In 
response to the comments, the final regulations do not require approval 
for the initial adoption of these elections for any year. For example, 
a plan sponsor that was using segment rates for the plan year beginning 
in 2010 can elect to switch to use the monthly corporate bond yield 
curve for the plan year beginning in 2011 and subsequent years without 
approval of the Commissioner (and, in such a case, if the plan had been 
using a different month for the segment rates, then the change to use 
the yield curve makes the applicable month election irrelevant). 
However, once an election has been made, any change requires the 
approval of the Commissioner.
    The final regulations provide that, in the case of a plan sponsor 
using the monthly corporate bond yield curve, if with respect to a 
decrement the benefit is only expected to be paid for one-half of a 
year (because the decrement was assumed to occur in the middle of the 
year), the interest rate for that year can be determined as if the 
benefit were being paid for the entire year.
    The final regulations provide that the interest rate elections are 
made by the plan sponsor, which is generally the employer or employers 
responsible for making contributions to or under the plan. In the case 
of plans that are multiple employer plans to which section 413(c)(4)(A) 
does not apply, the regulations provide that any reference to the plan 
sponsor means the plan administrator within the meaning of section 
414(g).
    The regulations provide that, except as otherwise provided, the 
effective interest rate determined under section 430(h)(2)(A) for the 
plan year is the single interest rate that, if used to determine the 
present value of the benefits that are taken into account in 
determining the plan's funding target for

[[Page 53019]]

the plan year, would result in an amount equal to the plan's funding 
target determined for the plan year under section 430(d) (without 
regard to calculations for plans in at-risk status under section 
430(i)).
    Some commenters asked how to determine the effective interest rate 
for a plan year for which a plan's funding target is equal to zero. The 
final regulations provide that if, for the plan year, the plan's 
funding target is equal to zero, then the effective interest rate 
determined under section 430(h)(2)(A) for the plan year is the single 
interest rate that, if used to determine the present value of the 
benefits that are taken into account in determining the plan's target 
normal cost for the plan year, would result in an amount equal to the 
plan's target normal cost determined for the plan year under section 
430(b) (without regard to calculations for plans in at-risk status 
under section 430(i)).
    The final regulations provide that the interest rates used to 
determine the amount of shortfall amortization installments and waiver 
amortization installments and the present value of those installments 
are determined based on the dates those installments are assumed to be 
paid, using the same timing rules that apply in determining target 
normal cost. Thus, for a plan that uses the segment rates, the first 
segment rate applies to installments assumed to be paid during the 
first five plan years, and the second segment rate applies to any 
installments assumed to be paid during the subsequent 15-year period. 
For this purpose, the shortfall amortization installments for a plan 
year are assumed to be paid on the valuation date for that plan year.
    Under the regulations, notwithstanding the general rules for 
determination of segment rates, for plan years beginning in 2008 or 
2009, the first, second, or third segment rate for a plan with respect 
to any month is equal to the sum of the product of that rate for that 
month, multiplied by the applicable percentage and the product of the 
weighted average interest rate determined under the rules of section 
412(b)(5)(B)(ii)(II) (as that provision was in effect for plan years 
beginning in 2007), multiplied by a percentage equal to 100 percent 
minus the applicable percentage. This transition rule does not apply to 
a plan if the first plan year of the plan begins on or after January 1, 
2008. A plan sponsor may elect not to apply the transition rule, but 
once an election has been made any change to that election requires the 
approval of the Commissioner.
    The proposed regulations would have required that the pre-PPA '06 
weighted average be determined as of the same month as the segment 
rates. In response to comments, the final regulations provide that this 
weighted average interest rate can be determined for the same month 
that is used to determine the segment rates, or for the month that 
contains the first day of the plan year (that is, the month that was 
used under section 412(b)(5)(B)(ii)(II) as in effect before amendment 
by PPA '06).
    The final regulations provide that any change to any interest rate 
election that is made for the first plan year beginning in 2009 or 2010 
is automatically approved by the Commissioner and does not require the 
Commissioner's specific prior approval.

VI. Section 1.430(i)-1 Special Rules for Plans in At-Risk Status

    Section 1.430(i)-1 of the final regulations provides special rules 
related to determining the funding target and making other computations 
for certain defined benefit plans that are in at-risk status for the 
plan year due to their significantly underfunded status. The at-risk 
rules do not apply to small plans. For this purpose, a small plan is 
defined as a plan sponsored by an employer that had 500 or fewer 
participants (including both active and inactive participants) in 
defined benefit plans (other than multiemployer plans) sponsored by the 
employer or any member of the employer's controlled group on each day 
during the preceding plan year.
    The regulations generally adopt the rules set forth in the proposed 
regulations, with a few modifications that are noted in this preamble. 
In general, the regulations provide that a plan is in at-risk status 
for a plan year if the FTAP for the preceding plan year is less than 80 
percent (65, 70, and 75 percent, respectively, for plan years beginning 
in 2008, 2009, and 2010), and the at-risk FTAP for the preceding plan 
year is less than 70 percent. For this purpose, the FTAP is defined in 
the same manner as under Sec.  1.430(d)-1. The at-risk FTAP of a plan 
for a plan year is a fraction (expressed as a percentage) the numerator 
of which is the value of plan assets for the plan year after 
subtraction of the prefunding balance and the funding standard 
carryover balance under section 430(f)(4)(B), and the denominator of 
which is the at-risk funding target of the plan for the plan year 
(determined using the special actuarial assumptions that apply to plans 
in at-risk status, but without regard to the loading factor that is 
imposed with respect to certain plans in at-risk status).
    In the case of a new plan that was neither the result of a merger 
nor involved in a spin-off, the FTAP and the at-risk FTAP are equal to 
100 percent for years before the plan exists. As a result, such a plan 
will not be in at-risk status in its first year. In addition, if the 
funding target of the plan is equal to zero for a plan year, the FTAP 
and the at-risk FTAP are equal to 100 percent for that plan year. 
Accordingly, a plan that is established without benefits accruing for 
periods prior to establishment will not be in at-risk status in its 
second year. The final regulations reserve a place for rules regarding 
a plan that is involved in a merger or a spin-off and a newly 
established plan with a predecessor plan that was in at-risk status.
    In accordance with section 430(i)(1), the final regulations provide 
that the at-risk funding target and the at-risk target normal cost of 
the plan for the plan year are generally determined in the same manner 
as for plans not in at-risk status, but using special actuarial 
assumptions. In addition, the at-risk funding target and the at-risk 
target normal cost are increased to take into account a loading factor 
if the plan has been in at-risk status for at least 2 out of the 
preceding 4 plan years. In any case, the at-risk funding target and the 
at-risk target normal cost of a plan for a plan year cannot be less 
than the plan's funding target and target normal cost determined 
without regard to the at-risk rules. This minimum value is determined 
on a plan-wide (rather than a participant-by-participant) basis.
    The actuarial assumptions used to determine a plan's at-risk 
funding target for a plan year are the actuarial assumptions that are 
applied under section 430, with certain modifications as set forth in 
the final regulations. Under the proposed regulations, if by the end of 
the plan year that begins 10 years after the end of the current plan 
year (that is, the end of the 11th plan year beginning with the current 
plan year) an employee would be eligible to commence an immediate 
distribution upon termination of employment, then the employee would be 
assumed to terminate and commence an immediate distribution at the 
earliest retirement date under the plan, or, if later, at the end of 
the current plan year. For this purpose, the proposed regulations 
defined the earliest retirement age under the plan as the earliest age 
at which a participant could terminate employment and receive an 
immediate distribution. The proposed regulations provided that, under 
the special at-risk actuarial

[[Page 53020]]

assumptions, all employees who are subject to the special early 
retirement assumption are also assumed to elect the optional form of 
benefit available under the plan at the assumed retirement age that 
would result in the highest present value of benefits.
    In response to comments, the final regulations clarify that the 
special early retirement assumption applies to all participants 
(employees, terminated vested participants, and beneficiaries) who have 
not commenced payment and is not limited to employees. In addition, the 
final regulations provide that the earliest retirement age is not 
earlier than the age at which the participant's benefit is fully 
vested. The regulations also provide that, under the special at-risk 
actuarial assumptions, all participants and beneficiaries (not just the 
participants who are subject to the special early retirement 
assumption) who are assumed to retire on a particular date are assumed 
to elect the optional form of benefit available under the plan that 
would result in the highest present value of benefits commencing at 
that date.
    If a plan that is in at-risk status for the plan year has not been 
in at-risk status for one or more of the preceding 4 plan years, the 
plan's funding target for the plan year is determined as a blend of the 
funding target determined as if the plan were not in at-risk status and 
the funding target determined as if the plan had been in at-risk status 
for each of the preceding 4 plan years. For this purpose, the funding 
target determined as if the plan had been in at-risk status for each of 
the preceding 4 plan years is determined without applying the loading 
factor if the plan has not been in at-risk status for two of the 
preceding four plan years. The increase in the funding target to 
reflect the at-risk rules is phased in over 5 years at 20 percent per 
year. The final regulations provide similar rules for determining the 
at-risk target normal cost of a plan that has been in at-risk status 
for fewer than 5 consecutive plan years.
    For purposes of applying the rules under section 430(i), the 
regulations set forth rules for making certain calculations with 
respect to the first plan year to which section 430 applies to the 
plan. These rules are generally the same as the rules that apply for 
that plan year for purposes of section 436.
    There is no special rule for determining the at-risk funding target 
for the plan year preceding the plan year section 430 first applies to 
the plan. This is because, for a plan to which section 430 applies 
beginning in 2008, if the plan's FTAP for the preceding plan year was 
less than the 65 percent needed to be in at-risk status (pursuant to 
the transition rule described in section 430(i)(4)(B)), then the at-
risk FTAP would necessarily be below the 70 percent needed for the plan 
to be in at-risk status (because the at-risk funding target cannot be 
less than the funding target for a plan that is not in at-risk status). 
However, plans for which the effective date of section 430 is delayed 
for purposes of determining the minimum required contribution will have 
to determine the at-risk funding target for the plan year that precedes 
the plan year for which section 430 is first effective with respect to 
the plan.

VII. Section 1.436-1 Limits on Benefits and Benefit Accruals Under 
Single Employer Defined Benefit Plans

A. Overview and General Rules
    1. In general.
    The final regulations set forth the rule that a defined benefit 
pension plan that is subject to section 412 and that is not a 
multiemployer plan is a qualified plan only if it satisfies the 
requirements of section 436. This requirement is a qualification 
requirement. A plan satisfies the requirements of section 436 only if 
the plan meets the requirements of these regulations. The final 
regulations generally adopt the rules set forth in the proposed 
regulations, but with a number of modifications that are discussed in 
this preamble.
    2. New plans.
    In accordance with section 436(g), the final regulations provide 
that the limitations described in sections 436(b), 436(c), and 436(e) 
do not apply to a plan for the first five plan years of the plan. Thus, 
the only benefit limitation under section 436 that could apply under a 
plan that is not a successor plan during the first five years of its 
existence is the section 436(d) limitation applicable to accelerated 
benefit payments (such as single-sum distributions). Except as 
otherwise provided by the Commissioner in guidance of general 
applicability, plan years of the plan include the following (in 
addition to plan years during which the plan was maintained by the 
employer or plan sponsor): (1) Plan years when the plan was maintained 
by a predecessor employer within the meaning of Sec.  1.415(f)-1(c)(1); 
(2) plan years of another defined benefit plan maintained by a 
predecessor employer within the meaning of Sec.  1.415(f)-1(c)(2) 
within the preceding five years if any participants in the plan 
participated in that other defined benefit plan (even if the plan 
maintained by the employer is not the plan that was maintained by the 
predecessor employer); and (3) plan years of another defined benefit 
plan maintained by the employer within the preceding five years if any 
participants in the plan participated in that other defined benefit 
plan.
    3. Terminated plans.
    The proposed regulations did not contain any special rules 
regarding terminated plans. Commenters asked whether, upon plan 
termination, the benefit restrictions under section 436(d) operate to 
prevent the purchase of annuities to satisfy plan benefits or the 
distribution of single sums. In response, these regulations contain 
special rules for plan terminations. Under the final regulations, in 
general, any section 436 limitations in effect immediately before the 
termination of a plan continue to apply. However, the limitations under 
section 436(d) do not apply to prohibited payments that are made to 
carry out the termination of a plan in accordance with applicable law. 
For example, a plan sponsor's purchase of an irrevocable commitment 
from an insurer to pay benefit liabilities with respect to participants 
in connection with the standard termination of a plan, in accordance 
with 4041(b)(3) of ERISA and 29 CFR 4041.28, does not violate section 
436(d).
    4. Multiple employer plans.
    The regulations under section 436 apply to plans maintained by one 
employer (including a controlled group of employers) and to multiple 
employer plans (within the meaning of section 413(c)). In the case of a 
multiple employer plan to which section 413(c)(4)(A) applies, the rules 
under the regulations apply separately with respect to each employer 
under the plan, as if each employer maintained a separate plan. Thus, 
the benefit limitations under section 436 can apply differently to 
employees of different employers under such a multiple employer plan. 
In the case of a multiple employer plan to which section 413(c)(4)(A) 
does not apply (that is, a plan described in section 413(c)(4)(B) that 
has not made the election for section 413(c)(4)(A) to apply), the 
regulations apply as if all participants in the plan were employed by a 
single employer. Some commenters objected to the separate application 
of the rules of section 436 for a multiple employer plan to which 
section 413(c)(4)(A) applies. These commenters argued that, because it 
is impossible for an employer to make a contribution that inures only 
to the benefit of its employees in the event of plan termination, it is 
inappropriate to apply the requirements of section 436 separately for 
each employer. No change has been made to reflect this comment because 
the IRS

[[Page 53021]]

and the Treasury Department believe that this rule is consistent with 
the applicable statutory requirement under section 413(c)(4)(A) that 
applies that the funding rules apply separately to each employer.
    5. Treatment of plan as of close of prohibited or cessation period.
    The final regulations use the term section 436 measurement date to 
identify the dates on which a section 436 limitation may apply or cease 
to apply (as discussed in section VII.A.8 of this preamble). The 
regulations provide that, if a limitation on prohibited payments under 
section 436(d) (such as single-sum distributions) applies to a plan as 
of a section 436 measurement date, but that limit subsequently ceases 
to apply to the plan as of a later section 436 measurement date, then 
the limitation does not apply to benefits with annuity starting dates 
that are on or after that later section 436 measurement date. In 
addition, the final regulations provide that, if a limitation on 
benefit accruals under section 436(e) applies to a plan, then, unless 
the plan provides otherwise, benefit accruals under the plan will 
resume effective as of the section 436 measurement date as of which 
benefit accruals are no longer restricted. If the accruals resume 
effective in the middle of a plan year, the plan must comply with the 
rules relating to partial years of participation and the prohibition on 
double proration under Department of Labor regulation 29 CFR 2530.204-
2(c) and (d).
    With respect to a participant who was barred from receiving an 
optional form of benefit that would have been payable but for the 
application of a restriction on prohibited payments pursuant to section 
436(d), once the restriction ceases to apply, the participant's 
benefits will continue to be paid in the form previously elected unless 
the plan offers the participant a new election that modifies the prior 
election. The final regulations permit a plan to provide that the 
participant will be offered the opportunity to have a new election 
under which the form of benefit previously elected may be modified, 
subject to applicable qualification requirements, and clarify that any 
such new election will result in a new annuity starting date for 
purposes of section 417.
    Similarly, a plan is permitted to be amended to provide that any 
benefit accruals that were limited under the rules of section 436(e) 
are credited under the plan once the limitation no longer applies, 
subject to applicable qualification requirements (including the 
limitations of section 436(c)). If a plan provides for the restoration 
of benefit accruals for the period of the limitation under preexisting 
plan terms, the plan is generally treated as having adopted an 
amendment that has the effect of increasing liabilities under the plan. 
The proposed regulations would have provided an exception to this rule 
if the period of limitation is 12 months or less. The final regulations 
retain that exception, but clarify that the exception is available only 
if the plan's AFTAP would be at least 60 percent taking into account 
the restored accruals.\6\
---------------------------------------------------------------------------

    \6\ The PBGC has informed the IRS and the Treasury Department 
that it expects similarly to treat such an automatic restoration of 
missed benefit accruals as a plan amendment, unless it is covered by 
the 12-month exception.
---------------------------------------------------------------------------

    In response to questions raised by commenters, the final 
regulations clarify the treatment of unpredictable contingent event 
benefits that are limited under the rules of section 436(b). The 
regulations provide that, in general, if any unpredictable contingent 
event benefits are limited under section 436(b) with respect to an 
unpredictable contingent event, then that limitation applies to all 
such benefits that otherwise would have been paid to any plan 
participant with respect to that unpredictable contingent event. 
However, if the limitations of section 436(b) with respect to an 
unpredictable contingent event cease to apply for a plan year as a 
result of a contribution that satisfies the requirements of section 
436(b)(2) or a certification of the AFTAP for the plan year, then any 
unpredictable contingent event benefits that were limited under the 
rules of section 436(b) for the plan year must automatically become 
payable, retroactive to the period those benefits would have been 
payable under the terms of the plan (other than plan terms implementing 
the requirements of section 436(b)). If the benefits do not become 
payable during the plan year in accordance with the preceding sentence, 
then the plan is treated as if it does not provide for those benefits. 
However, all or any portion of those benefits can be restored pursuant 
to a plan amendment that meets the requirements of section 436(c) and 
other applicable qualification requirements.
    6. Treatment of plan amendments that do not go into effect.
    The proposed regulations did not contain rules regarding the 
treatment of plan amendments that do not go into effect because of the 
restrictions under section 436(c). To clarify the application of these 
rules, the final regulations provide that, if a plan amendment does not 
go into effect as of the effective date of the amendment because of the 
limitations of section 436(c), but is permitted to go into effect later 
in the plan year as a result of additional contributions that satisfy 
the requirements of section 436(c)(2) or a certification of the AFTAP 
for the plan year, then the plan amendment must automatically take 
effect as of the first day of the plan year (or, if later, the original 
effective date of the amendment). However, if the plan amendment cannot 
take effect during the plan year, then it must be treated as if it were 
never adopted, unless the plan amendment provides otherwise. For 
example, a plan amendment that provides a benefit increase pursuant to 
a collective bargaining agreement could provide that if the plan 
amendment does not take effect pursuant to the rules of section 436(c), 
it will take effect at the earliest time it is permitted to take effect 
pursuant to the rules of section 436(c).
    7. Deemed election to reduce prefunding and funding standard 
carryover balances.
    Pursuant to section 436(f)(3), the final regulations provide that, 
if a limitation on prohibited payments under section 436(d)(1) or 
(d)(3) would otherwise apply to a plan, the employer is treated as 
having made an election under section 430(f) to reduce the prefunding 
balance or funding standard carryover balance by such amount as is 
necessary for the AFTAP to be at or above the applicable threshold (60 
or 80 percent, as the case may be) \7\ in order for the benefit 
limitation not to apply to the plan. In such a case, the plan sponsor 
is treated as having made that election on the section 436 measurement 
date as of which the benefit limitation would otherwise apply. This 
deemed election applies if the plan provides for prohibited payments 
that would be limited in a plan year, regardless of whether a plan 
participant is eligible or elects to receive such a distribution during 
the plan year (but does not apply if the plan does not provide for 
prohibited payments that are subject to the benefit limitation or if 
the plan is not subject to section 436(d) because the

[[Page 53022]]

plan was frozen before September 1, 2005). However, the deemed 
reduction applies with respect to this limitation only if the 
prefunding and funding standard carryover balances to be reduced are 
large enough to avoid the application of the limitation. Thus, no 
reduction of prefunding and funding standard carryover balances is 
required if the limitation would still apply for a year even if those 
balances were reduced to zero. The final regulations provide that, if a 
plan is presumed to have an AFTAP of less than 60 percent because the 
plan did not receive a certification of the AFTAP before the first day 
of the 10th month of the plan year under the section 436(h)(2) 
presumption rules, then the plan is treated as if the plan's funding 
standard carryover balance and prefunding balance are insufficient to 
increase the plan's AFTAP to the threshold percentage.
---------------------------------------------------------------------------

    \7\ Pursuant to section 436(j)(3), for any plan year, if the 
FTAP is 100 percent or more (or at a lower transition threshold for 
2008 through 2010) determined without subtracting the prefunding 
balance and funding standard carryover balance from the value of 
plan assets, then the AFTAP is determined without regard to that 
subtraction. The deemed election under section 436(f)(3) is 
irrelevant in the case of the 100% funding threshold that applies 
under section 436(d)(2) when an employer is in bankruptcy because, 
either the plan is 100 percent or more funded without the 
subtraction (and therefore no subtraction need be made under section 
436(j)(3)), or the plan is less than 100 percent funded without the 
subtraction so that the value of plan assets must necessarily be 
insufficient for a deemed election to increase the plan's AFTAP to 
100%.
---------------------------------------------------------------------------

    In addition, the regulations provide that, in the case of a plan 
maintained pursuant to one or more collective bargaining agreements 
between an employee representative and one or more employers in which a 
benefit limitation under section 436(b), 436(c), or 436(e) would 
otherwise apply to the plan, the employer is treated as having made an 
election under section 430(f) to reduce the prefunding balance or 
funding standard carryover balance by such amount as is necessary for 
the AFTAP to be at or above the applicable threshold for the benefit 
limitation not to apply to the plan, taking into account the 
unpredictable contingent event benefits or plan amendment, as 
applicable. In such a case, the plan sponsor is treated as having made 
that election on the section 436 measurement date as of which the 
benefit limitation would otherwise apply. As in the case of the deemed 
reduction in funding balances to avoid the application of section 
436(d), the deemed reduction applies only if the prefunding and funding 
standard carryover balances to be reduced are large enough to avoid the 
application of the limitation under section 436(b), 436(c), or 436(e), 
as applicable.
    The proposed regulations would have provided that, in the case of a 
plan with respect to which a collective bargaining agreement applies to 
some, but not all, of the plan participants, the plan is considered a 
collectively bargained plan if at least 25 percent of the participants 
in the plan are members of collective bargaining units for which the 
benefit levels under the plan are specified under a collective 
bargaining agreement. A number of commentators asked which participants 
are taken into account in this calculation. The final regulations adopt 
the definition in the proposed regulations, but also provide that such 
a plan is considered a collectively bargained plan if at least 50 
percent of the employees benefiting under the plan (within the meaning 
of Sec.  1.410(b)-3(a)) are members of collective bargaining units for 
which the benefit levels under the plan are specified under a 
collective bargaining agreement.
    8. Section 436 measurement date.
    The section 436 measurement date is a defined term under the final 
regulations that is used to describe the date that stops or starts the 
application of the limitations of sections 436(d) and 436(e) and is 
also used for calculations with respect to applying the limitations of 
sections 436(b) and 436(c). The regulations provide that the date of 
the enrolled actuary's certification of the AFTAP for the plan year is 
a section 436 measurement date if it is made during the plan year. The 
regulations further provide that a section 436 measurement date also 
occurs where there is a change in the plan's presumed AFTAP under the 
presumption rules of section 436(h). In addition, the regulations 
provide a series of rules in cases where the enrolled actuary's 
certification of the AFTAP for a plan year is made after the end of the 
plan year, as described in section VII.G of this preamble.
    9. Notice requirement under section 101(j) of ERISA.
    Section 101(j) of ERISA requires the plan administrator of a single 
employer plan to provide a written notice to participants and 
beneficiaries within 30 days after certain specified dates, including 
the date the plan has become subject to a restriction described in the 
ERISA provisions that are parallel to Code sections 436(b) and 436(d); 
and, in the case of a plan that is subject to the ERISA provisions that 
are parallel to Code section 436(e), the valuation date for the plan 
year for which the plan's AFTAP is less than 60 percent (or, if 
earlier, the date the AFTAP is presumed to be less than 60 percent). 
These regulations do not include any guidance on section 101(j) of 
ERISA. The benefit restrictions under section 436 (and the parallel 
provisions under section 206(g) of ERISA) apply without regard to 
whether the requirements of section 101(j) of ERISA are satisfied.
B. Limitation on Plant Shutdown and Other Unpredictable Contingent 
Event Benefits
    In accordance with section 436(b), the final regulations provide 
that a plan that provides for any unpredictable contingent event 
benefit \8\ must provide that the benefit will not be paid to a plan 
participant during a plan year if the AFTAP for the plan year is less 
than 60 percent (or is 60 percent or more but would be less than 60 
percent if the AFTAP were redetermined applying an actuarial assumption 
that the likelihood of the occurrence of the unpredictable contingent 
event during the plan year is 100 percent). However, this prohibition 
on payment of unpredictable contingent event benefits no longer applies 
for a plan year, effective as of the first day of the plan year, if the 
plan sponsor makes the contribution specified in section 436(b)(2), as 
described in section VII.F of this preamble.
---------------------------------------------------------------------------

    \8\ See also Notice 2007-14, 2007-1 CB 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.
---------------------------------------------------------------------------

    The regulations provide that an unpredictable contingent event 
benefit is any benefit or increase in benefits to the extent the 
benefit or increase would not be payable but for the occurrence of an 
unpredictable contingent event, and that an unpredictable contingent 
event is a plant shutdown (whether full or partial) or similar event, 
or an event other than the attainment of any age, performance of any 
service, receipt or derivation of any compensation, or the occurrence 
of death or disability. For example, if a plan provides for an 
unreduced early retirement benefit upon the occurrence of an event 
other than the attainment of any age, performance of any service, 
receipt or derivation of any compensation, or the occurrence of death 
or disability, then that unreduced early retirement benefit is an 
unpredictable contingent event benefit to the extent of any portion of 
the benefit that would not be payable but for the occurrence of the 
event, even if the remainder of the benefit is payable without regard 
to the occurrence of the event. Similarly, if a plan includes a benefit 
payable upon the presence (including the absence) of circumstances 
specified in the plan (other than the attainment of any age, 
performance of any service, receipt or derivation of any compensation, 
or the occurrence of death or disability), but not upon a severance 
from employment that does not include those circumstances, that benefit 
is an unpredictable contingent event benefit.
    Unpredictable contingent event benefits attributable to a plant 
shutdown or other unpredictable contingent event that occurred within a 
period during which no limitation under section 436(b) applied to the 
plan are not

[[Page 53023]]

affected by the limitation as it applies in a subsequent period. For 
example, if a plant shutdown occurs in 2010 and the plan's funded 
status is such that benefits contingent upon that plant shutdown are 
not subject to the limitation described in section 436(b) for that 
calendar plan year, section 436(b) does not apply to restrict payment 
of those benefits even if another plant shutdown occurs in 2012 that 
results in the restriction of benefits that are contingent upon that 
later plant shutdown under section 436(b) (where the plan's adjusted 
funding target attainment percentage for 2012 would be less than 60 
percent taking into account the liability attributable to those 
shutdown benefits). Conversely, if a plant shutdown occurs in 2010 and 
a plan's funded status is such that its shutdown benefits are subject 
to the limitation under section 436(b) for that plan year and cannot be 
paid, those shutdown benefits related to the 2010 plant shutdown are 
not permitted to be paid in a later year even if the plan's AFTAP for 
the later year is at or above 60 percent (subject to the rules 
permitting plan amendments to reinstate previously restricted benefits, 
including unpredictable contingent event benefits, as described in 
section VII.A.5 of this preamble).
    To clarify the operation of the rules regarding unpredictable 
contingent event benefits, the final regulations contain rules of 
application that were not provided in the proposed regulations. The 
regulations clarify that the limitations of section 436(b) apply on a 
participant-by-participant basis. Thus, whether payment or commencement 
of an unpredictable contingent event benefit under a plan is restricted 
with respect to a participant is determined based on whether the 
participant satisfies the plan's eligibility requirements (other than 
the attainment of any age, performance of any service, receipt or 
derivation of any compensation, or the occurrence of death or 
disability) for such a benefit in a plan year in which the limitations 
of section 436(b) apply. In addition, in the case of a plan that 
provides for a benefit that depends upon the occurrence of more than 
one unpredictable contingent event with respect to a participant, the 
unpredictable contingent event for purposes of section 436(b) occurs 
upon the last of those unpredictable contingent events. Cessation of a 
benefit under a plan upon the occurrence of a specified event does not 
trigger the application of a limitation under section 436(b). Thus, 
section 436(b) does not prohibit provisions of a plan that provide for 
cessation, suspension, or reduction of any benefits upon occurrence of 
any event.
C. Limitations on Plan Amendments Increasing Plan Liabilities
    In accordance with section 436(c), the regulations provide that a 
plan satisfies the limitation on plan amendments increasing liability 
for benefits only if the plan provides that no amendment to the plan 
that has the effect of increasing liabilities of the plan by reason of 
increases in benefits, establishment of new benefits, changing the rate 
of benefit accrual, or changing the rate at which benefits become 
nonforfeitable is permitted to take effect if the AFTAP for the plan 
year is less than 80 percent (or is 80 percent or more but would be 
less than 80 percent if the AFTAP were redetermined taking into account 
the benefits attributable to the amendment). However, this prohibition 
on plan amendments no longer applies for a plan year if the employer 
makes the contribution specified in section 436(c)(2), as described in 
section VII.F of this preamble. Thus, an amendment that provides for an 
increase in benefits under a formula that is based solely on service 
performed by participants after the amendment is adopted is always 
permitted to take effect in a plan year because the amount of 
contribution described in section 436(c)(2) is $0. However, see Sec.  
1.430(d)-1(d)(2) for a rule that requires such an amendment to be taken 
into account in determining the funding target and the target normal 
cost in certain situations.
    The final regulations clarify the application of section 436(c) to 
certain pre-existing plan provisions. Under the regulations, if a plan 
contains a provision that provides for the automatic restoration of 
benefit accruals that were not permitted to accrue because of the 
application of section 436(e), the restoration of those accruals is 
generally treated as a plan amendment that is subject to section 
436(c). However, the automatic restoration of benefit accruals that 
were not permitted to accrue because of the application of section 
436(e) is not treated as a plan amendment that is subject to section 
436(c) if the continuous period of the limitation is 12 months or less 
and the AFTAP for the plan would not be less than 60 percent taking 
into account the restored benefit accruals for the prior plan year. The 
application of section 436(c) to other pre-existing plan provisions 
that result in benefit increases is expected to be addressed in future 
proposed regulations.
    In accordance with section 436(c)(3), the limitation on amendments 
increasing liabilities does not apply to any amendment that provides 
for an increase in benefits under a formula that is not based on a 
participant's compensation, but only if the rate of increase in 
benefits does not exceed the contemporaneous rate of increase in 
average wages of participants covered by the amendment. Like the 
proposed regulations, the final regulations provide that the 
determination of the rate of increase in average wages is made by 
taking into consideration the net increase in average wages from the 
period of time beginning with the effective date of the most recent 
benefit increase applicable to all of those participants who are 
covered by the current amendment and ending on the effective date of 
the current amendment.
    If the participants covered by an amendment include both currently 
employed participants and terminated participants, all covered 
participants are included in determining the increase in average wages 
of the participants covered by the amendment. For this purpose, 
terminated participants who are not employees at any time during the 
period from the effective date of the most recent benefit increase 
applicable to all the participants who are covered by the current 
amendment and ending on the effective date of the current amendment are 
treated as having no increase or decrease in wages for the period after 
severance from employment. Alternatively, the employer can adopt two 
amendments--one that increases benefits for currently employed 
participants that is eligible for this exception based solely on the 
wages of those current employees, and another that increases benefits 
for terminated participants. However, the amendment that applies only 
to terminated participants (who received no increase in wages from the 
employer during the period over which the increase in average wages is 
determined) would not be eligible for this exception.
    As under the proposed regulations, the final regulations exempt a 
plan amendment (or any pre-existing plan provision) that provides for a 
mandatory increase in the vesting of benefits under the Code or ERISA 
(such as vesting rate increases pursuant to statute, plan termination 
amendments or partial terminations under section 411(d)(3), and vesting 
increases required by the rules for top-heavy plans under section 416) 
from the requirements of section 436(c) to the extent the increase in 
vesting is necessary to enable the plan to continue to satisfy the 
requirements for qualified plans. In addition, the final

[[Page 53024]]

regulations provide that the Commissioner may, in guidance of general 
applicability, issue additional rules under which other amendments to a 
plan are not treated as amendments to which section 436(c) applies.
    The final regulations contain a rule to clarify when an amendment 
is considered to take effect for purposes of section 436(c). Under 
these regulations, in the case of an amendment that increases benefits, 
the amendment takes effect under a plan on the first date on which any 
individual who is or could be a participant or beneficiary under the 
plan would obtain a legal right to the increased benefit if the 
individual were on that date to satisfy the applicable requirements for 
entitlement to the benefit (such as the attainment of any age, 
performance of any service, receipt or derivation of any compensation, 
or the occurrence of death, disability, or severance from employment). 
Thus, if a plan's operations change to provide increased benefits so 
that participants obtain a legal right to the benefit at the time of 
the change (with the corresponding plan amendment adopted in that year 
or in a subsequent year that is within the remedial amendment period 
under section 401(b)), the amendment takes effect at the time of the 
change and must satisfy the requirements of section 436(c) for that 
earlier year. By contrast, if an amendment is adopted to provide 
increased benefits retroactively with respect to a prior year, but no 
participant's benefits are increased until the amendment is adopted, 
the amendment takes effect at the time of adoption and must satisfy the 
requirements of section 436(c) for the plan year the amendment is 
adopted.
D. Limitations on Prohibited Payments
    1. Funding percentage less than 60 percent.
    In accordance with section 436(d)(1), under the final regulations, 
a plan must provide that, if the plan's AFTAP for a plan year is less 
than 60 percent, a participant or beneficiary is not permitted to elect 
an optional form of benefit that includes a prohibited payment, and the 
plan will not pay any prohibited payment, with an annuity starting date 
that is on or after the applicable section 436 measurement date. The 
proposed regulations would have provided that, if a participant 
requests such a prohibited payment, the plan must permit the 
participant to elect another form of benefit available under the plan 
and this rule is retained in these regulations. Thus, if a participant 
elects a single-sum payment which is not available because of the 
section 436 limitations, the participant has to retain the right to 
elect the annuity forms offered under the plan which do not contain 
prohibited payments. Similar rules apply in any case in which a 
beneficiary is entitled to a prohibited payment (for example, where a 
qualified pre-retirement survivor annuity is offered in an alternative 
single-sum payment).
    The proposed regulations would also have provided that, if a 
participant requests such a prohibited payment, the plan must permit 
the participant to elect to defer payment to a later date to the extent 
permitted under applicable qualification requirements. Questions have 
arisen regarding whether this deferral right must be provided to a 
participant who has separated from service and has attained normal 
retirement age if the plan does not otherwise provide such a 
participant with the right to defer commencement of benefits. The final 
regulations clarify that, if a participant requests a prohibited 
payment at a time when that form of payment cannot be made, the 
participant retains the right to delay commencement of benefits only if 
the right to delay commencement is in accordance with the terms of the 
plan and applicable qualification requirements (such as sections 
411(a)(11) and 401(a)(9)). Thus, where payment of an optional form of 
benefit is restricted pursuant to section 436(d), the plan is not 
required to provide participants with deferral rights that would not be 
otherwise available.
    Some commenters requested that the regulations permit a plan under 
which prohibited payments are restricted to handle an election for a 
prohibited payment by paying the maximum amount permitted under section 
436(d) each year, with payments resuming under the originally elected 
schedule as soon as permitted under section 436(d) (with appropriate 
catch-up payments). The final regulations do not permit this approach 
because the IRS and the Treasury Department believe that a plan should 
pay benefits in accordance with a participant's actual election (with 
the associated spousal consent, if applicable). However, the final 
regulations clarify that a plan can offer special optional forms of 
benefit during the period in which section 436(d)(1) applies to the 
plan. For example, a plan may permit participants or beneficiaries who 
commence benefits during this period to elect, within a specified 
period after the date on which the limitation ceases to apply to the 
plan, to receive the remaining benefit in the form of a single-sum 
payment equal to the present value of the remaining benefit to the 
extent then permitted under section 436(d)(3). Any such optional forms 
must satisfy section 436(d) and applicable qualification requirements, 
including satisfaction of section 417(e) and section 415 (at each 
annuity starting date).
    2. Bankruptcy.
    In accordance with section 436(d)(2), under the final regulations, 
a plan must provide that a participant or beneficiary is not permitted 
to elect an optional form of benefit that includes a prohibited 
payment, and the plan will not pay any prohibited payment, with an 
annuity starting date that occurs during any period in which the plan 
sponsor is a debtor in a case under title 11, United States Code, or 
similar Federal or State law, until the date on which the enrolled 
actuary of the plan certifies that the plan's AFTAP for the plan year 
is not less than 100 percent. Participants and beneficiaries can still 
elect those forms of distribution offered under the plan which do not 
contain a prohibited payment, as well as the right to defer 
distribution, as described in section VII.D.1 of this preamble.
    3. Limited payment if percentage at least 60 percent but less than 
80 percent.
    In accordance with section 436(d)(3), under the final regulations, 
a plan must provide that, in any case in which the plan's AFTAP for a 
plan year is 60 percent or more but is less than 80 percent, a 
participant or beneficiary is not permitted to elect the payment of an 
optional form of benefit that includes a prohibited payment, and the 
plan will not pay any prohibited payment, with an annuity starting date 
that is on or after the applicable section 436 measurement date, unless 
the present value, determined in accordance with section 417(e)(3), of 
the portion of the benefit that is being paid in a prohibited payment 
does not exceed the lesser of: (A) 50 percent of the present value 
(determined in accordance with section 417(e)(3)) of the benefit 
payable in the optional form of benefit that includes the prohibited 
payment; or (B) 100 percent of the PBGC maximum benefit guarantee 
amount.
    Commenters asked a number of questions about this limitation, 
including how to determine the portion of the benefit that is being 
paid in a prohibited payment. Under the final regulations, this 
determination is made based on the applicable optional form of benefit. 
If the benefit is being paid in an optional form for which any of the 
payments is greater than the amount payable under a straight life 
annuity to the participant or beneficiary (plus any social security 
supplements described

[[Page 53025]]

in the last sentence of section 411(a)(9) payable to the participant or 
beneficiary) with the same annuity starting date, then the portion of 
the benefit that is being paid in a prohibited payment is the excess of 
each payment over the smallest payment during the participant's 
lifetime under the optional form of benefit (treating a period during 
the participant's lifetime in which no payments are made as a payment 
of zero). Thus, for an optional form of benefit in the form of a single 
sum or in the form of installments over a fixed period of years, the 
entire optional form of benefit would be a prohibited payment, whereas 
in the case of a social security leveling optional form of benefit 
(under which higher payments are made before an assumed social security 
commencement date, with lower payments thereafter for life), only the 
amount payable before the assumed social security commencement date 
that exceeds the ultimate life annuity amount would be a prohibited 
payment (so that a social security leveling form could go into effect 
under section 436(d)(3) if the present value of the payments before the 
assumed social security commencement date that exceed the ultimate life 
annuity amount does not exceed the present value of 50 percent of the 
total benefit or, if less, the PBGC maximum benefit guarantee amount). 
In addition, the PBGC maximum benefit guarantee amount is the present 
value (determined under guidance prescribed by the Pension Benefit 
Guaranty Corporation, using the interest and mortality assumptions 
under section 417(e)) of the maximum benefit guarantee with respect to 
a participant (based on the participant's age or the beneficiary's age 
at the annuity starting date) under section 4022 of ERISA for the year 
in which the annuity starting date occurs.
    Like the proposed regulations, the final regulations require that, 
if an optional form of benefit that is otherwise available under the 
terms of the plan is not available as of the annuity starting date 
because of the application of the requirements of section 436(d)(3), 
the plan must permit a participant or beneficiary to elect to bifurcate 
the benefit into unrestricted and restricted portions. The plan must 
also offer the participant or beneficiary any other optional form of 
benefit otherwise available under the plan at that annuity starting 
date that would satisfy the 50 percent/PBGC maximum benefit guarantee 
amount limitation, as well as any general right to defer commencement 
of benefits under the plan (in the same manner described in section 
VII.D.1 of this preamble).
    Commenters had raised a number of questions concerning calculation 
of the unrestricted portion of the benefit for purposes of the rule 
requiring the participant's benefit to be bifurcated into unrestricted 
and restricted portions. The final regulations clarify that the benefit 
for the unrestricted portion of the benefit is calculated at the 
annuity starting date with respect to each optional form of benefit 
that does not satisfy the 50 percent/PBGC maximum benefit guarantee 
amount limitation. In general, the unrestricted portion of the benefit 
with respect to an optional form of benefit is 50 percent of the amount 
payable under that optional form of benefit. Thus, if a participant 
elects a single-sum payment of a participant's entire benefit which is 
not permitted under section 436(d)(3), the bifurcation rule requires 
the plan to offer the participant half that amount as a single-sum 
payment (with the remainder being payable as a life annuity or any 
other optional form available under the plan at that annuity starting 
date that does not include a prohibited payment).
    However, for an optional form of benefit that is a prohibited 
payment on account of a social security leveling feature or a refund of 
employee after-tax contributions feature, the unrestricted portion of 
the benefit is that optional form of benefit applied to only 50 percent 
of the total benefit. Thus, for a social security leveling option, the 
unrestricted portion is not equal to half the amount payable before the 
assumed social security commencement date, plus half the amount payable 
thereafter, but instead would be a result of applying the plan's social 
security leveling option provision to half of the participant's total 
benefit. This may often result in the unrestricted portion being a 
series of payments ending at the assumed social security commencement 
date (which, in combination with a life annuity for the restricted 
portion commencing at the same annuity starting date plus the 
participant's anticipated social security benefit, would provide level 
income to the participant to the extent permitted under section 
436(d)(3)).
    In any event, the unrestricted portion of the benefit must be 
reduced to the extent necessary so that the present value (determined 
in accordance with section 417(e)) of the unrestricted portion of that 
optional form of benefit does not exceed the PBGC maximum benefit 
guarantee amount.
    If the participant or beneficiary elects to bifurcate the benefit, 
the plan must provide, with respect to the unrestricted portion, the 
optional form of benefit elected by the participant, treating the 
unrestricted portion of the benefit as if it were the participant's or 
beneficiary's entire benefit under the plan. The participant can elect 
to receive the remainder of his or her benefit in any optional form of 
benefit available under the plan at that annuity starting date that 
does not include a prohibited payment. If a plan provides for an 
optional form of benefit that applies to only a portion of the 
participant's benefit, that optional form of benefit must be available 
on a proportionate basis with respect to the unrestricted portion of 
the benefit. The rules of Sec.  1.417(e)-1 are applied separately to 
the separate optional forms for the unrestricted and restricted 
portions of the benefits.
    Under the regulations, a plan is permitted to provide for separate 
elections with respect to the unrestricted and restricted portions of 
the benefit, without regard to whether the participant or beneficiary 
elects an optional form of benefit that includes a prohibited payment 
that is not permitted to be paid under the rules of section 436(d)(3). 
Like the proposed regulations, the final regulations permit a plan to 
offer optional forms of benefit that are solely available during a 
period during which benefits are restricted pursuant to section 
436(d)(3). For example, during that period, a plan may offer an 
optional form of benefit (such as a single sum) that provides for the 
current payment of the unrestricted portion of the benefit, with a 
delayed commencement for the restricted portion of the benefit or for 
an immediate commencement of the restricted portion of the benefit in 
an annuity form with a right to commute to a single sum offered upon 
the enrolled actuary's certification that the plan's AFTAP is at least 
80 percent. As another example, a plan that offers a subsidized early 
retirement benefit or a single-sum payment based on the normal 
retirement benefit may offer an optional form of benefit that combines 
an unsubsidized single-sum payment for over 50 percent of the accrued 
benefit with a subsidized early retirement life annuity for the 
remainder of the accrued benefit, provided that the optional form 
satisfies the section 436(d)(3) 50 percent/PBGC maximum benefit 
guarantee limitation. Any such optional forms must also satisfy the 
applicable qualification requirements, including satisfaction of 
section 417(e) and, in the case of optional forms of benefit with 
different annuity starting dates, section 415 at the

[[Page 53026]]

later annuity starting date for the restricted portion of the benefit.
    The IRS and the Treasury Department anticipate that plan sponsors 
will use one of several alternative approaches to providing benefit 
election packages to participants in order to comply with the benefit 
restrictions of section 436(d). As part of any of these alternatives, 
as described in the preceding paragraph, the plan may provide special 
optional forms that are available only when the restrictions of section 
436(d) apply.
    One approach would be to provide a benefit election package that 
does not take into account the restrictions under section 436(d), 
regardless of whether a benefit restriction under section 436(d) 
applies at the time the package is furnished. In periods during which a 
restriction applies, the plan must permit the participant either to (1) 
choose another optional form of benefit that does not have a 
restriction, (2) defer commencement of the payments to a later annuity 
starting date, or (3) if the AFTAP is at least 60 percent but less than 
80 percent, elect to bifurcate the benefit--that is, to receive the 
unrestricted portion in the optional form chosen and to make a separate 
election with respect to the remaining portion of the benefit (the 
restricted portion). Thus, if a participant elects a form of benefit 
that is not permitted pursuant to a restriction, then the participant 
must be informed which benefit options are currently available in order 
to enable the participant to make a new election among the available 
forms if the participant so chooses. This approach entails a two-step 
process.
    As an alternative to this approach, the plan may provide for a one-
step process which eliminates the need to go back to the participant if 
the participant elects a form of benefit that is restricted. Under this 
one-step process, a participant who elects an optional form of benefit 
that could be subject to restrictions would also elect a backup 
distribution form which would apply if restrictions are applicable as 
of the annuity starting date for the distribution. As part of the 
backup election, this one-step process would also provide the 
participant with the opportunity to defer commencement and, if the 
AFTAP is at least 60 percent but less than 80 percent, to bifurcate the 
benefit.
    A third alternative approach, which also eliminates the need to go 
back to the participant, anticipates the application of the section 
436(d) restriction on prohibited payments. Under this approach, with 
respect to an optional form of benefit that includes a prohibited 
payment that is not permitted to be paid and for which no additional 
information is needed to make that determination (such as information 
regarding a social security leveling optional form of benefit), rather 
than wait for the participant or beneficiary to elect such optional 
form, the plan is permitted to provide for separate elections with 
respect to the restricted and unrestricted portions of that optional 
form of benefit. However, the alternative described in the preceding 
sentence is permitted to be applied only if the plan applies the rule 
to all the optional forms for which no additional information from the 
participant or beneficiary is needed to make that determination and the 
plan identifies the option that the bifurcation election replaces. 
Thus, if section 436(d)(3) applies to a plan during a period and the 
plan's prohibited payments include a single-sum payment, installments 
for 10 years, and various life annuities with social security leveling 
features that depend on information from the participant regarding 
assumed social security commencement date and social security amount, 
then during this period the plan can offer 50% of the single-sum 
payment and 50% of the 10-year installments, without having to offer 
half of each of the potential life annuities with social security 
leveling features. Thus, the package presented to a participant would 
generally present optional forms of benefit that satisfy the 
requirements of section 436(d) at the annuity starting date (but if the 
participant were to elect a life annuity with a social security 
leveling feature that is not permitted to be paid, then the plan would 
have to follow the two-step approach). If this third approach is used 
and the plan's benefit restriction status with respect to the 
participant's annuity starting date changes after the package is 
furnished, then updated information would be provided to the 
participant that takes into account the plan's new status. As part of 
the overall methodology, a plan may provide special optional forms that 
are available only when the restrictions of section 436(d) apply. Thus, 
the package presented to a participant would only present optional 
forms of benefit that satisfy the requirements of section 436(d) at the 
annuity starting date.
    A participant for whom a prohibited payment (or a series of 
prohibited payments under a single optional form of benefit) is made in 
accordance with the 50 percent/PBGC maximum benefit guarantee amount 
limitation cannot receive any additional payment that would be a 
prohibited payment during any period of consecutive plan years to which 
any of the limitations under section 436(d) apply. Benefits provided to 
a participant and any beneficiary of that participant are aggregated 
for purposes of determining whether the distribution complies with the 
limitations under section 436(d)(3). The final regulations also reflect 
the rules of section 436(d)(3)(B)(ii), which describe how this limited 
distribution is allocated among the beneficiaries of a participant. The 
final regulations include two special rules for beneficiaries. First, 
while generally the annuity starting date for the payments to the 
participant is also the annuity starting date for payments to the 
beneficiary, a new annuity starting date occurs if the amount payable 
to the beneficiary can exceed the monthly amount that would have been 
paid to the participant had he or she not died (such as where a plan 
offers to pay the death benefit in a single sum). Second, if a 
beneficiary is not an individual, the prohibited payment amount is 
determined based on the monthly amount payable in installments over 20 
years (instead of the monthly amount paid under a straight life 
annuity).
    4. Exception for certain frozen plans.
    In accordance with section 436(d)(4), the limitations under section 
436(d) do not apply to a plan for any plan year if the terms of the 
plan, as in effect for the period beginning on September 1, 2005, 
provide for no benefit accruals with respect to any participants. 
However, if such a plan provides for any benefit accruals thereafter, 
this exception ceases to apply for the plan as of the date those 
accruals start.
    5. Prohibited payment.
    In accordance with section 436(d)(5), the final regulations provide 
that the term prohibited payment means any payment for a month that is 
in excess of the monthly amount paid under a single life annuity (plus 
any social security supplements described in the last sentence of 
section 411(a)(9)) to a participant or beneficiary whose annuity 
starting date occurs during any period that a limitation on prohibited 
payments is in effect, as well as any payment for the purchase of an 
irrevocable commitment from an insurer to pay benefits. The final 
regulations also include in this definition any transfer of assets and 
liabilities to another plan maintained by the same employer (or by any 
member of the employer's controlled group) that is made in order to 
avoid or terminate the application of section 436 benefit limitations. 
In addition, the Commissioner may provide for other amounts to be 
identified as prohibited

[[Page 53027]]

payments in revenue rulings and procedures, notices, and other guidance 
published in the Internal Revenue Bulletin.
    Commenters raised several concerns regarding the definition of the 
term annuity starting date as applied to various types of benefits 
restricted under section 436(d). The final regulations generally adopt 
the definition of annuity starting date set forth in Sec.  1.401(a)-20, 
Q&A-10(b), modified to cover retroactive annuity starting dates, as 
well as transactions that are restricted under section 436(d) even 
though they do not constitute distributions to any participant. Thus, 
the final regulations provide that, for purposes of applying the 
limitations on prohibited payments under section 436(d), the term 
annuity starting date is defined as the first day of the first period 
for which an amount is payable as an annuity as described in section 
417(f)(2)(A)(i) if the benefit is being paid in the form of an annuity. 
In the case of a benefit not payable in the form of an annuity, the 
annuity starting date is the annuity starting date for the qualified 
joint and survivor annuity that is payable under the plan at the same 
time as the benefit that is not payable as an annuity, and, in the case 
of an amount payable under a retroactive annuity starting date, the 
annuity starting date is the benefit commencement date. The effect of 
the change in the definition of annuity starting date will be to 
provide plan administrators with some additional time to adjust their 
administrative practices to take into account a newly issued 
certification of the plan's AFTAP. The definition of annuity starting 
date also includes the date of the purchase of an irrevocable 
commitment from an issuer to pay benefits under the plan and the date 
of any transfer of assets and liabilities to another plan maintained by 
the same employer (or by any member of the employer's controlled group) 
that is made in order to avoid or terminate the application of section 
436 benefit limitations.
    The final regulations include rules to clarify how the limitations 
apply with respect to any prohibited payment that is in the form of a 
purchase of an irrevocable commitment from an insurer or a transfer of 
assets and liabilities. In the case of a purchase of insurance, the 
annuity starting date is the date of the purchase of the irrevocable 
commitment from the insurer and the present value (for purposes of the 
section 436(d)(3) limitation regarding the lesser of 50 percent of the 
present value of the benefit and the PBGC maximum benefit guarantee 
amount) is based on the cost to the plan (which is generally the 
insurance premium). Where a prohibited payment is in the form of a 
plan-to-plan transfer of assets and liabilities, the annuity starting 
date is the date of the transfer to the other qualified plan and the 
present value is based on the present value of the liabilities 
transferred (determined in accordance with section 414(l)). However, 
any such transfer would have to independently satisfy section 414(l), 
which generally would not be possible where only a portion of a 
participant's or beneficiary's accrued benefit is being transferred.
    The regulations do not address the change made by section 
101(c)(2)(C) of WRERA '08, under which the limitations of section 436 
do not apply to distributions permitted without consent of the 
participant under section 411(a)(11) (that is, distributions where the 
total present value of the benefit is not in excess of $5,000). That 
change is expected to be addressed in future proposed regulations. 
Those proposed regulations are also expected to address issues 
regarding plan loans.
E. Limitation on Benefit Accruals
    In accordance with section 436(e), the final regulations require a 
plan to provide that, in any case in which the plan's AFTAP for a plan 
year is less than 60 percent, benefit accruals under the plan will 
cease as of the applicable section 436 measurement date. If a plan must 
cease benefit accruals under this limitation, then the plan is also not 
permitted to be amended in a manner that would increase the liabilities 
of the plan by reason of an increase in benefits or establishment of 
new benefits. This rule applies regardless of whether an amendment 
would otherwise be permissible under section 436(c)(3) (involving 
certain amendments to increase benefits under a formula not based on a 
participant's compensation). This prohibition on additional benefit 
accruals no longer applies for a plan year if the plan sponsor makes 
the contribution specified in section 436(e)(2), as described in 
section VII.F of this preamble.
    The regulations do not reflect the provisions of section 203 of 
WRERA '08 under which, for the first plan year beginning during the 
period beginning on October 1, 2008 and ending on September 30, 2009, 
the plan's AFTAP for purposes of the benefit limitation under section 
436(e) is equal to the larger of the AFTAP for the plan year and the 
AFTAP for the prior plan year. That change is expected to be addressed 
in future proposed regulations.
F. Rules Relating to Techniques To Avoid Benefit Limitations
    The final regulations provide rules regarding techniques that the 
plan sponsor may utilize to avoid or terminate benefit limitations 
under section 436 that are largely unchanged from the rules in the 
proposed regulations. For example, under the final regulations, an 
employer sponsoring a plan that would otherwise be subject to the 
limitations of section 436 can avoid the application of those limits by 
reducing the funding standard carryover balance and prefunding balance 
by an amount sufficient to avoid the limitations or, if the deadline 
for making contributions for the prior plan year has not passed, by 
making additional contributions for a prior plan year that are not 
added to the prefunding balance. Either of these techniques will have 
the effect of increasing the adjusted plan assets that form the 
numerator of the AFTAP calculation, which will increase the AFTAP. In 
addition, a plan sponsor could make the specific contributions 
described in section 436(b)(2), 436(c)(2), or 436(e)(2) or provide 
security to the plan as described in section 436(f)(1). These latter 
two techniques for avoiding or terminating the application of the 
benefit limitations of section 436 are described in Sec.  1.436-1(f).
    The regulations provide that the plan sponsor is permitted to make 
additional contributions that are specifically designated at the time 
of the contribution as a contribution used to avoid the application of 
a limitation under section 436(b), 436(c), or 436(e). To address 
questions raised with respect to the proposed regulations, the final 
regulations provide general rules that apply to all contributions 
pursuant to section 436(f) (referred to as section 436 contributions) 
and also separately state the rules with respect to the amount of 
contributions needed to avoid each type of benefit limitation.
    Section 436 contributions must be separate from any minimum 
required contributions under section 430 and are disregarded in 
determining the maximum addition to the prefunding balance under 
section 430(f)(6) and Sec.  1.430(f)-1(b)(1)(i)(B). The designation of 
a contribution as a section 436 contribution must be made at the time 
the contribution is used to avoid or terminate the applicable benefit 
limitations and, except as specifically provided, cannot subsequently 
be recharacterized with respect to any plan year as a contribution to 
satisfy a minimum required contribution obligation, or otherwise. Thus, 
if a plan

[[Page 53028]]

sponsor makes a section 436 contribution for a plan year but does not 
make the minimum required contribution for the plan year, the plan will 
fail to satisfy the minimum funding requirements under section 430 for 
the plan year. The designation must be made in accordance with the 
rules and procedures that otherwise apply to elections under the 
regulations (at Sec.  1.430(f)-1(f)) with respect to funding balances. 
The deductibility of a section 436 contribution is determined pursuant 
to the rules of section 404 (including the rules of section 404(a) and 
(o)). For this purpose, the section 436 contribution is considered to 
be made for the plan year during which it is made.
    Any section 436 contribution made on a date other than the 
valuation date for the plan year must be adjusted with interest at the 
plan's effective interest rate under section 430(h)(2)(A) for the plan 
year. If the plan's effective interest rate for the plan year has not 
been determined at the time of the contribution, then this interest 
adjustment must be made using the highest rate of the three segment 
rates as applicable for the plan year under section 430(h)(2)(C). In 
such a case, if the effective interest rate for the year under section 
430(h)(2)(A) is subsequently determined to be less than that highest 
rate, the excess is recharacterized as an employer contribution taken 
into account under section 430 for the current plan year.
    Any section 436 contribution must be paid before the unpredictable 
contingent event benefits are permitted to be paid, the plan amendment 
is permitted to go into effect, or the benefit accruals are permitted 
to resume. In addition, any section 436 contribution with respect to a 
plan year must be paid during the plan year. Furthermore, no prefunding 
balance or funding standard carryover balance under section 430(f) may 
be used as a section 436 contribution to avoid benefit limitations.
    In the case of a contribution to avoid or terminate the application 
of the limitation on benefits attributable to an unpredictable 
contingent event under section 436(b), in the event that the AFTAP for 
the plan year determined without taking into account the liability 
attributable to the unpredictable contingent event benefits is less 
than 60 percent, the amount of the contribution under section 436(b)(2) 
is equal to the amount of the increase in the funding target of the 
plan for the plan year if the benefits attributable to the 
unpredictable contingent event were included in the determination of 
the funding target. In the event that the AFTAP for the plan year 
determined without taking into account the liability attributable to 
the unpredictable contingent event benefits is 60 percent or more, but 
would be less than 60 percent taking the unpredictable contingent event 
benefits into account, the amount of the contribution under section 
436(b)(2) is the amount that would be sufficient to result in an AFTAP 
for the plan year of 60 percent if the benefits attributable to the 
unpredictable contingent event were included in the determination of 
the funding target and the contribution were included as part of the 
assets of the plan. In this latter case, the determination of the 
amount that would be sufficient to result in an AFTAP of 60 percent 
must take into account all liabilities for benefits attributable to 
prior unpredictable contingent event benefits that were permitted to be 
paid, prior plan amendments that were permitted to take effect, and 
restored accruals (and any associated section 436 contributions).
    In the case of a contribution to avoid or terminate the application 
of the limitation on benefits attributable to a plan amendment under 
section 436(c), in the event that the AFTAP for the plan year 
determined without taking into account the liability attributable to 
the plan amendment is less than 80 percent, the amount of the 
contribution under section 436(c)(2) is equal to the amount of the 
increase in the funding target of the plan for the plan year if the 
liabilities attributable to the amendment were included in the 
determination of the funding target. In the event that the AFTAP for 
the plan year determined without taking into account the liability 
attributable to the plan amendment is 80 percent or more, but would be 
less than 80 percent taking the amendment into account, the amount of 
the contribution under section 436(c)(2) is the amount that would be 
sufficient to result in an AFTAP for the plan year of 80 percent if the 
liabilities attributable to the plan amendment were included in the 
determination of the funding target and the contribution were included 
as part of the assets of the plan. In this latter case, the 
determination of the amount that would be sufficient to result in an 
AFTAP of 80 percent must take into account all liabilities for benefits 
attributable to prior unpredictable contingent event benefits that were 
permitted to be paid, prior plan amendments that were permitted to take 
effect, and restored benefit accruals (and any associated section 436 
contributions).
    In the case of a contribution to avoid or terminate the application 
of the limitation on accruals under section 436(e), the amount of the 
contribution under section 436(e)(2) is equal to the amount sufficient 
to result in an AFTAP for the plan year of 60 percent if the 
contribution were included as part of the assets of the plan. For this 
purpose, the determination of the amount that would be sufficient to 
result in an AFTAP of 60 percent must take into account all liabilities 
for benefits attributable to prior unpredictable contingent event 
benefits that were permitted to be paid, prior plan amendments that 
were permitted to take effect, and restored benefit accruals (and any 
associated section 436 contributions).
    A plan sponsor is treated as making a section 436 contribution to 
bring the funding level to the applicable threshold only after the 
plan's enrolled actuary certifies an AFTAP for the plan year that takes 
into account the increased liability for the unpredictable contingent 
event benefits, the plan amendments, or accruals, and any associated 
section 436 contributions.
    Another technique for a plan sponsor to avoid the application of 
the benefit limitations of section 436 is for the plan sponsor to 
provide security. In such a case, the AFTAP for the plan year is 
determined by treating as an asset of the plan any security provided by 
a plan sponsor by the valuation date for the plan year in a form 
meeting certain specified requirements. However, this security is not 
taken into account as a plan asset for any other purpose, including 
section 430. The only security permitted to be provided by a plan 
sponsor for this purpose is (i) a bond issued by a corporate surety 
company that is an acceptable surety for purposes of section 412 of 
ERISA or (ii) cash, or United States obligations that mature in three 
years or less, held in escrow by a bank or insurance company. The 
regulations reflect section 436(f)(1)(C) and (D) in specifying when the 
security is to be contributed to the plan and when it may be released. 
If the security is turned over to the plan, then that amount is treated 
as an employer contribution when it is turned over to the plan. The 
final regulations provide that any such security turned over to the 
plan pursuant to the enforcement mechanism cannot be treated as a 
contribution to avoid or terminate the application of a section 436 
benefit limitation under section 436(b)(2), 436(c)(2), or 436(e)(2). In 
response to commenter concerns, the final regulations permit security 
to be replaced, provided that the new security is in at least the same 
amount and satisfies certain other requirements.

[[Page 53029]]

G. Presumed Underfunding for Purposes of Benefit Limitations
    1. General rules relating to operation of presumptions.
    Section 436(h) sets forth rules under which the limitations of 
section 436 are applied during the portion of a plan year before the 
enrolled actuary has certified the plan's AFTAP for the plan year. The 
regulations set forth rules for the application of the section 436 
benefit limitations during the period the presumptions of section 
436(h) apply to a plan, and describe the interaction of the application 
of those presumptions on plan operations with plan operations after the 
plan's enrolled actuary has issued a certification of the plan's AFTAP 
for the plan year. The rules in the final regulations have been revised 
from those in the proposed regulations to reflect comments.
    Under the final regulations, a plan must provide that, for any 
period during which a presumption under section 436(h) applies to the 
plan, the limitations applicable under section 436 are applied to the 
plan as if the AFTAP for the year were the presumed AFTAP determined 
under the applicable rule under section 436(h), in accordance with the 
rules of operation set forth in the regulations. For example, a plan's 
prefunding balance and funding standard carryover balance must be 
reduced under section 436(f)(3) if the reduction would be sufficient to 
avoid the applicable limitation based on the presumed AFTAP. The final 
regulations provide rules for determining the amount of the reduction 
in balances that are similar to those under the proposed regulations.
    The final regulations use the presumed AFTAP and the interim value 
of adjusted plan assets as of a date to calculate a presumed adjusted 
funding target as of that date. The presumed adjusted funding target is 
then compared to the interim value of adjusted plan assets in order to 
determine the amount of any deemed reduction in the funding standard 
carryover balance and prefunding balance under section 436(f)(3) that 
is made as of the first day of the plan year (and, in certain 
circumstances, that may be made later in the plan year).
    The interim value of adjusted plan assets is equal to the value of 
adjusted plan assets as of the first day of the plan year, determined 
without regard to future contributions and future elections with 
respect to the plan's prefunding and funding standard carryover 
balances under section 430(f) (for example, elections to add to the 
prefunding balance for the prior plan year, elections to use the 
prefunding and funding standard carryover balances to offset the 
minimum required contribution for a year, and elections (including 
deemed elections under section 436(f)(3)) to reduce the prefunding and 
funding standard carryover balances for the current plan year). The 
presumed adjusted funding target is equal to the interim value of 
adjusted plan assets for the plan year divided by the presumed AFTAP.
    The final regulations provide that, if the presumed AFTAP for the 
plan year changes during the year, the rules regarding the deemed 
election to reduce funding balances must be reapplied based on the new 
presumed AFTAP. This will typically occur on the first day of the 4th 
month of a plan year, but could also happen at a different date if the 
enrolled actuary certifies the AFTAP for the prior plan year during the 
current plan year. In order to determine the amount of any reduction in 
prefunding balance and funding standard carryover balance that would 
apply in such a situation, a new presumed adjusted funding target must 
be established, which is then compared to the updated interim value of 
adjusted plan assets. For this purpose, the updated interim value of 
adjusted plan assets for the plan year is determined as the interim 
value of adjusted plan assets as of the first day of the plan year 
updated to take into account contributions for the prior plan year and 
section 430(f) elections with respect to the plan's prefunding and 
funding standard carryover balances made before the date of the change 
in the presumed AFTAP, and the new presumed adjusted funding target is 
equal to the updated interim value of adjusted plan assets divided by 
the new presumed AFTAP. The reapplication of the rules regarding the 
deemed election under section 436(f)(3) may require an additional 
reduction in funding balances if the amount of the reduction in funding 
balances that is necessary to reach the applicable threshold to avoid 
the application of the limitation under section 436(d) or (e) is 
greater than the amount that was initially reduced. Prior reductions of 
funding balances continue to apply.
    Pursuant to section 436(d)(2), during any period in which the plan 
sponsor of a plan is a debtor in a case under title 11, United States 
Code, or any similar Federal or State law, no prohibited payment may be 
paid if the plan's enrolled actuary has not yet certified the plan's 
AFTAP for the plan year to be at least 100 percent. The presumption 
rules of section 436(h) do not apply for purposes of section 436(d)(2).
    The regulations also provide special rules that apply when the 
presumed AFTAP is deemed to be under 60 percent as a result of the 
application of section 436(h)(2). In such a case, the regulations 
provide that neither a reduction of the funding standard carryover 
balance or prefunding balance nor a section 436 contribution can be 
used to increase the presumed AFTAP to 60 percent. Accordingly, no 
prohibited payment can be made, no benefit accruals are permitted, and 
no plan amendment increasing benefits can take effect during the period 
the plan is deemed to have an AFTAP of less than 60 percent. However, 
an unpredictable contingent event benefit is permitted to be paid if 
the plan sponsor makes the contribution described in section 
436(b)(2)(B) (that is, a contribution equal to the increase in the 
funding target attributable to the unpredictable contingent event 
benefits).
    2. Rules relating to unpredictable contingent event benefits and 
plan amendments.
    Under the regulations, for purposes of applying the limitations 
applicable to unpredictable contingent event benefits and plan 
amendments during the presumption period, the presumed adjusted funding 
target must be adjusted to take into account the increase in the 
funding target attributable to the unpredictable contingent event 
benefits or the plan amendment, as well as the increase in the funding 
target attributable to any unpredictable contingent event benefits that 
are permitted to be paid as a result of any unpredictable contingent 
event that occurred, or plan amendment that has taken effect, in the 
prior plan year to the extent not taken into account in the prior plan 
year adjusted funding target attainment percentage, and any other 
unpredictable contingent event benefits that are permitted to be paid 
as a result of any unpredictable contingent event that occurred, or 
plan amendment that has taken effect, in the current plan year to the 
extent not previously taken into account in the presumed adjusted 
funding target for the plan year. The final regulations use the term 
inclusive presumed adjusted funding target for this value. The 
inclusive presumed adjusted funding target is used to calculate an 
inclusive presumed AFTAP by comparing it to the interim value of 
adjusted plan assets, updated to take into account contributions for 
the prior plan year, prior section 436 contributions for the current 
plan year, and section 430(f) elections with respect to the plan's 
prefunding and funding standard carryover balances made before the date 
of the unpredictable

[[Page 53030]]

contingent event or the date the plan amendment would take effect.
    During the presumption period, the rules relating to the deemed 
election of a collectively bargained plan to reduce the funding 
standard carryover balance and the prefunding balance must be applied 
based on the inclusive presumed adjusted funding target and the updated 
interim value of adjusted plan assets. Thus, if, based on the 
comparison of the updated interim value of adjusted plan assets and the 
inclusive presumed adjusted funding target, a plan amendment with 
respect to a collectively bargained plan can only take effect if the 
funding standard carryover balance and prefunding balance are reduced, 
then those balances must be reduced. A plan sponsor of a plan that is 
not a collectively bargained plan (and, thus, is not required to reduce 
the funding standard carryover balance and the prefunding balance) is 
permitted to reduce those balances in order to increase the updated 
interim value of adjusted plan assets that is compared to the inclusive 
presumed adjusted funding target.
    Under the final regulations, if the ratio of the updated interim 
value of adjusted plan assets to the inclusive presumed adjusted 
funding target is less than the applicable threshold under section 
436(b) or 436(c), then the plan is not permitted to provide any 
benefits attributable to the unpredictable contingent event, nor is the 
plan amendment permitted to take effect, unless the plan sponsor makes 
a contribution that would allow payment of unpredictable contingent 
event benefits or would permit a plan amendment increasing benefit 
liabilities to take effect under section 436(b)(2) or 436(c)(2). 
However, if, after application of any reduction in the funding standard 
carryover balance or prefunding balance (whether mandatory or 
optional), the ratio of the interim value of adjusted plan assets to 
the inclusive presumed adjusted funding target is greater than or equal 
to the applicable threshold under section 436(b) or 436(c), then the 
plan is not permitted to limit the payment of unpredictable contingent 
event benefits, nor is the plan permitted to restrict a plan amendment 
increasing benefit liabilities from becoming effective based on an 
expectation that the limitations under section 436(b) or 436(c) will 
apply following the enrolled actuary's certification of the AFTAP for 
the plan year.
    3. Updated determination of presumed AFTAP.
    If, in accordance with the rules of operation under the final 
regulations, unpredictable contingent event benefits are permitted to 
be paid, or a plan amendment takes effect, because the plan sponsor 
makes a contribution described in section 436(b)(2) or (c)(2), then the 
presumed adjusted funding target must be adjusted to reflect the 
increase in the funding target attributable to the unpredictable 
contingent event benefits or the plan amendment and the present value 
of the section 436 contribution is included in the updated interim 
value of adjusted plan assets. For example, if a plan amendment would 
have caused the ratio of the updated interim value of adjusted plan 
assets to the inclusive presumed AFTAP to be less than 80 percent, 
then, after the contribution described in section 436(c)(2)(B) is made, 
the presumed AFTAP would be 80 percent. The adjustment to the presumed 
adjusted funding target is made on the date the contribution is made, 
and that date is a section 436 measurement date.
    Similar rules apply to a contribution described in section 
436(e)(2). Thus, if benefit accruals are permitted to resume in a plan 
year because the plan sponsor makes the contribution described in 
section 436(e)(2), then the presumed AFTAP will be increased to 60 
percent. In this case, the adjustment to the presumed adjusted funding 
target is made on the date the contribution is made, and that date is a 
section 436 measurement date.
    The regulations also provide that if a plan's funding standard 
carryover balance or prefunding balance is reduced as a result of 
applying the presumption rules, then the presumed AFTAP for the plan 
year is increased to reflect the higher interim value of adjusted plan 
assets resulting from the reduction in the funding standard carryover 
balance or prefunding balance. For example, if a reduction in the 
prefunding balance is made in an amount necessary to increase the 
presumed AFTAP to 60 percent, then the presumed AFTAP is changed to 60 
percent. The date of the event that causes the reduction is a section 
436 measurement date.
    4. Periods for which no presumptions apply to the plan.
    Under the regulations, if no presumptions under section 436(h) 
apply to a plan during a period and the plan's enrolled actuary has not 
yet issued the certification of the plan's actual AFTAP for the plan 
year, the plan is not permitted to limit the payment of prohibited 
payments under section 436(d) or the accrual of benefits under section 
436(e) based on an expectation that those sections will apply to the 
plan once an actuarial certification is issued. However, the 
limitations on unpredictable contingent event benefits under section 
436(b) and plan amendments increasing benefit liabilities under section 
436(c) must be applied during that period by treating the preceding 
year's certified AFTAP as if it were a presumed AFTAP and applying the 
rules for the presumption period as described in this preamble. Thus, 
an inclusive presumed adjusted funding target must be determined that 
takes into account prior events (including the unpredictable contingent 
event or plan amendment, any other unpredictable contingent event 
benefits that were permitted to be paid as a result of any 
unpredictable contingent event that occurred, and any other plan 
amendment that took effect, earlier during the plan year to the extent 
not taken into account in the certified AFTAP for the plan year, and 
any earlier section 436 contributions made for the plan year to the 
extent those contributions were not taken into account in the certified 
AFTAP).
    If after application of those rules the plan would be treated as 
having an AFTAP below the applicable threshold (taking into account the 
increase in the funding target attributable to the unpredictable 
contingent event benefits or the increase in liability attributable to 
the plan amendment), the unpredictable contingent event benefits are 
not permitted to be paid, and the plan amendment is not permitted to 
take effect, unless the plan sponsor makes a contribution that would 
allow payment of the unpredictable contingent event benefits or would 
permit the plan amendment to go into effect. In the case where the plan 
sponsor makes section 436 contributions to avoid the application of the 
applicable benefit limitations, to the extent those contributions would 
not be needed to permit the payment of the unpredictable contingent 
event benefits or for a plan amendment increasing benefits to go into 
effect based on a subsequent certification of the AFTAP for the current 
plan year that takes into account the increase in the funding target 
attributable to those unpredictable contingent event benefits or the 
increase in liability attributable to that plan amendment, the excess 
section 436 contributions are recharacterized as employer contributions 
and taken into account under section 430 for the current plan year.
    5. Periods following certification of AFTAP.
    Under the final regulations, the rules of operation that apply 
during a period for which a section 436(h) presumption is in effect no 
longer apply for a plan

[[Page 53031]]

year on and after the date the enrolled actuary for the plan issues a 
certification of the AFTAP of the plan for the current plan year, 
provided that the certification is issued before the first day of the 
10th month of the plan year. For example, the plan must provide that 
section 436(d) applies for distributions with annuity starting dates on 
and after the date of that certification using the certified AFTAP of 
the plan for the plan year. Similarly, the plan must provide that any 
prohibition on accruals under section 436(e) as a result of the 
enrolled actuary's certification that the AFTAP of the plan for the 
plan year is less than 60 percent is effective as of the date of the 
certification and that any prohibition on accruals ceases to be 
effective on the date the enrolled actuary issues a certification that 
the AFTAP of the plan for the plan year is at least 60 percent. In 
addition, in the case of a plan that has been issued a certification of 
the plan's AFTAP for a plan year by the plan's enrolled actuary, the 
plan sponsor must comply with the requirements of sections 436(b) and 
(c) for an unpredictable contingent event that occurs or a plan 
amendment that would take effect on or after the date of the enrolled 
actuary's certification. Thus, the plan administrator must determine if 
the AFTAP is at or above the applicable threshold, taking into account 
the increase in the funding target that would be attributable to the 
unpredictable contingent event or plan amendment, any other 
unpredictable contingent event benefits that were permitted to be paid 
as a result of any unpredictable contingent event that occurred (and 
any other plan amendment that went into effect) earlier during the plan 
year to the extent not taken into account in the certified AFTAP for 
the plan year, and any earlier section 436 contributions made for the 
plan year to the extent those contributions were not taken into account 
in the certified AFTAP.
    After the AFTAP for a plan year is certified by the plan's enrolled 
actuary, the deemed election to reduce funding balances must be 
reapplied based on the actual funding target for the year (provided the 
certification is issued before the first day of the 10th month of the 
plan year). This reapplication of the deemed election rules may require 
an additional reduction in funding balances if the amount of the 
reduction in funding balances that is necessary to reach the applicable 
threshold to avoid the application of the limitations under section 
436(d) or (e) is greater than the amount that was reduced. If the 
amount of the reduction in funding balances that is necessary to reach 
the applicable threshold to avoid the application of the benefit 
limitation is less than the amount that was reduced, then the prior 
reduction continues to apply. Similarly, if the amount of the reduction 
in funding balances that is necessary to reach the applicable threshold 
to avoid the application of the corresponding benefit limitation 
exceeds the remaining amount of the funding balances, then the prior 
reduction continues to apply and no further reduction is made.
    The enrolled actuary's certification of the AFTAP for the plan for 
the plan year does not affect unpredictable contingent event benefits 
that were permitted to be paid for events that occurred during the 
prior periods for which a presumption under section 436(h) applied. In 
addition, the enrolled actuary's certification of the AFTAP for the 
plan for the plan year does not affect a plan amendment that increases 
the liability for benefits where the amendment was permitted to first 
take effect during the prior periods for which a presumption under 
section 436(h) applies. Similarly, the enrolled actuary's certification 
of the AFTAP for the plan for the plan year does not affect prohibited 
payment distributions with annuity starting dates before the 
certification and does not require a cessation of accruals prior to the 
date of that certification.
    However, under the final regulations, if a plan does not pay 
benefits attributable to an unpredictable contingent event or plan 
amendment because of the application of a presumption under section 
436(h) for a plan year, the plan must provide for benefits that were 
not previously paid (or accrued) if such benefits would be permitted 
under the rules of section 436 based on the certified actual AFTAP for 
that plan year, taking into account the increase in the funding target 
that would be attributable to the unpredictable contingent event 
benefits or increase in liability due to the plan amendment.
    The final regulations clarify that, for any plan year in which a 
plan is providing benefits with respect to multiple unpredictable 
contingent events occurring within the plan year or plan amendments 
taking effect within the plan year, the section 436(b) restriction on 
unpredictable contingent event benefits and the section 436(c) 
restriction on plan amendments are applied with respect to each 
unpredictable contingent event or amendment by treating the increase in 
the funding target attributable to that event or amendment as if it 
included the increase in the funding target attributable to any earlier 
event or amendment (and including any earlier section 436 contributions 
for the plan year as plan assets). As applied with respect to the 
limitation on plan amendments, this rule ensures that the limitation 
applies in a similar fashion regardless of whether a benefit increase 
is effectuated through a series of amendments or through a single 
amendment. In the absence of such a rule, the limitation on plan 
amendments could be avoided through a series of amendments each of 
which provides only a small portion of the aggregate increase.
H. Determination of AFTAP and Presumed AFTAP
    1. Determination of presumed AFTAP based on prior plan year's 
certified AFTAP.
    The final regulations provide rules for the determination of the 
presumed AFTAP under section 436(h)(1) that are similar to the rules 
under the proposed regulations. Thus, if a limitation under section 436 
applied in the prior plan year based on a certified AFTAP during that 
plan year, the presumed AFTAP as of the first day of the current plan 
year is equal to the AFTAP for the prior plan year.
    The final regulations modify the rule in the proposed regulations 
that would have permitted a certified AFTAP that is made on or after 
the first day of the 10th month of the prior plan year to be used as 
the basis for the presumed AFTAP in the current plan year (in lieu of 
using the deemed ``under 60 percent'' AFTAP that applied for the prior 
plan year in such a case). Under the final regulations, such a late 
prior plan year certification is permitted to be so used only if the 
certification took into account any unpredictable contingent event 
benefits that are permitted to be paid based on unpredictable 
contingent events that occurred and plan amendments that went into 
effect prior to that late certification (along with any associated 
section 436 contributions).
    In addition, the regulations provide rules for the application of 
the presumptions if the plan actuary did not certify the AFTAP in the 
prior plan year, but that prior plan year ended before the first day of 
the 10th month of the plan year (so that section 436(h)(2) did not 
apply in that prior plan year). In such a case, the presumed AFTAP that 
applied as of the end of the prior plan year is treated as a certified 
AFTAP for that plan year which is used for purposes of the presumptions 
in the current year.
    2. Change in presumed AFTAP on first day of the 4th month.

[[Page 53032]]

    The final regulations provide rules for the application of section 
436(h)(3) that are similar to the proposed regulations. Some comments 
suggested that section 436(h)(3) applies on a limitation by limitation 
basis (with the result that a plan could have different presumed AFTAPs 
among the various limitations). However, the IRS and the Treasury 
Department believe that applying a single presumed AFTAP for all 
purposes reflects the statutory language of section 436(h)(3) and 
provides a consistent set of rules for applying the limitations during 
the period following the first day of the 4th month of the plan year. 
This interpretation is also essential for purposes of the rule under 
which benefits with respect to unpredictable contingent events that 
previously occurred during the plan year and plan amendments that 
previously took effect during the plan year are taken into account on a 
combined basis for purposes of applying the limitations with respect to 
subsequent events or amendments, such as a subsequent unpredictable 
contingent event.
    Under the final regulations, if the AFTAP for the prior plan year 
was at least 60 percent but less than 70 percent or was at least 80 
percent but less than 90 percent, and the actuary has not certified the 
AFTAP for the current plan year before the first day of the 4th month 
of the current plan year, then the presumed AFTAP for the current plan 
year is 10 percentage points lower than the AFTAP for the prior plan 
year. As under the proposed regulations, this 10 percentage point 
reduction will also apply as of the date the actuary certifies the 
AFTAP for the prior plan year, even if that certification is on or 
after the first day of the 4th month of the current plan year. In 
either case, the date of the 10 percentage point reduction is a section 
436 measurement date.
    The final regulations also provide that the 10 percentage point 
reduction applies in the first year that section 436 applies to the 
plan if the AFTAP for the prior plan year was at least 70 percent but 
less than 80 percent. This rule reflects an interpretation of section 
436(h)(3)(A) (providing for a 10 percentage point reduction in the 
AFTAP if a limitation under section 436 would have applied in the prior 
plan year) under which the determination of whether a limitation under 
section 436 would have applied in the prior plan year is made by 
assuming that section 436 was effective in that prior plan year.
    3. Change in presumed AFTAP on first day of 10th month for plans 
with no current year certification.
    The final regulations reflect the rules of section 436(h)(2), under 
which a plan for which the actuary has not issued a certification 
before the first day of the 10th month of the plan year is conclusively 
presumed to have an AFTAP of less than 60 percent beginning on that 
date. These rules are unchanged from the proposed regulations.
    4. Rules regarding certifications and range certifications.
    The proposed regulations would have provided that the enrolled 
actuary's certification of the AFTAP for a plan year must be made in 
writing, must be provided to the plan administrator, and must certify 
the plan's AFTAP for the plan year. The final regulations specify that 
the certification must also set forth the value of plan assets, the 
prefunding balance, the funding standard carryover balance, the value 
of the funding target used in the determination, the aggregate amount 
of annuity purchases included in the adjusted value of plan assets and 
the adjusted funding target, the unpredictable contingent event 
benefits permitted to be paid for unpredictable contingent events that 
occurred during the current plan year that were taken into account for 
the current plan year (including with any associated section 436 
contribution), the plan amendments that went into effect in the current 
plan year that were taken into account for the current plan year 
(including with any associated section 436 contribution), and any other 
relevant factors. The actuarial assumptions and funding methods used in 
the calculation for the certification must be the actuarial assumptions 
and funding methods used for the plan for purposes of determining the 
minimum required contributions under section 430 for the plan year. 
Thus, if the actuary who determines the minimum required contributions 
for the plan year is not the same actuary who certified the AFTAP for 
the plan year, then the second actuary must either apply the actuarial 
assumptions and methods used by the first actuary or must issue a 
revised certification for the plan year. See section VII.H.5 of this 
preamble for a description of the consequences of a revised 
certification.
    Some commenters requested that an enrolled actuary be permitted to 
certify the AFTAP for a plan year based on a ``roll forward'' of prior 
year actuarial results with appropriate adjustments for subsequent 
changes. The final regulations do not provide for such an alternative 
to estimate the AFTAP because the AFTAP must be based on the funding 
target for the current plan year and section 436 does not provide any 
rules to address discrepancies between an estimated AFTAP and an actual 
AFTAP for a plan year.
    As an alternative to certifying a specific number for the plan's 
AFTAP, the proposed regulations would have provided that the enrolled 
actuary is permitted to certify during the first 9 months of a plan 
year that the plan's AFTAP for that year is within a percentage 
``range'' that is either (i) 60 percent or higher, but less than 80 
percent, (ii) 80 percent or higher, or (iii) 100 percent or higher. The 
final regulations adopt this alternative and provide that such a 
``range'' certification ends the application of the presumptions, but 
only if the enrolled actuary follows up with a certification of the 
specific AFTAP and that the certified specific AFTAP is within the 
range of the earlier certification. In addition, the final regulations 
permit a range certification of under 60 percent.
    The proposed regulations would have provided that the specific 
AFTAP must be certified before the first day of the 10th month of that 
year. In response to concerns raised by commenters, the final 
regulations provide that, if the plan's enrolled actuary has issued a 
timely range certification for a plan year, then the specific AFTAP is 
permitted to be certified at any time prior to the end of the plan 
year. However, if the plan's enrolled actuary has issued a range 
certification for the plan year but does not issue a certification of 
the specific AFTAP for the plan by the last day of that plan year, the 
AFTAP for the plan is retroactively deemed to be less than 60 percent 
as of the first day of the 10th month of the plan year.
    If this range certification alternative is followed, then the plan 
is treated as having a certified AFTAP at the smallest value within the 
applicable range. For example, if the enrolled actuary certified that 
the AFTAP was more than 60 percent but less than 80 percent, then the 
plan is treated as having an AFTAP of 60 percent for purposes of 
applying the limitations of section 436(b) until the date of the 
specific AFTAP certification. In such a case, if there is an 
unpredictable contingent event or a plan amendment is adopted that 
increases liability for benefits, unpredictable contingent event 
benefits cannot be paid and the plan amendment cannot take effect 
unless the plan sponsor makes a contribution described in section 
436(b)(2) or 436(c)(2). If the plan sponsor makes a contribution under 
section 436(b)(2) or section 436(c)(2), the final regulations provide 
that the contribution is recharacterized as a regular employer 
contribution that is taken into account under section 430 for the 
current plan year to the extent it is determined that the contribution 
was

[[Page 53033]]

not needed to avoid the application of the benefit limit, based on the 
subsequent calculation of the specific AFTAP.
    The final regulations specify that the enrolled actuary is not 
permitted to certify the AFTAP based on a value of assets that includes 
contributions receivable for the prior plan year that have not actually 
been made as of the date of the certification. However, this rule does 
not apply to certifications that are made for plan years beginning 
before January 1, 2009. Thus, for a certification with respect to 2008, 
the enrolled actuary is permitted to take in account contributions for 
2007 that are reasonably expected but have not yet been made by the 
plan sponsor at the time of the certification. However, if the plan 
sponsor does not make those contributions, the enrolled actuary's 
certification will be incorrect.
    5. Change in certified AFTAP.
    If the enrolled actuary for the plan provides a certification of 
the AFTAP for the plan year (including a range certification) and that 
certified percentage is superseded by a subsequent determination of the 
AFTAP for that plan year, that later percentage generally must be 
applied for the period beginning with the date of the first 
certification. The subsequent determination could be the correction of 
a prior incorrect certification (including a certification for a plan 
year beginning in 2008 which assumed an employer contribution that was 
not made) or it could be an update of a prior correct certification to 
take into account subsequent events, such as plan amendments, 
additional contributions, or elections under section 430(f). The 
implications of such a change depend on whether the change is a 
material change or an immaterial change.
    For this purpose, the regulations define a change of AFTAP as a 
material change if plan operations with respect to benefits that are 
addressed by section 436, taking into account any actual contributions 
and elections under section 430(f) made by the plan sponsor based on 
the prior certified percentage, would have been different based on the 
subsequent determination of the plan's AFTAP for the plan year. A 
change in a plan's AFTAP for a plan year can be a material change even 
if the only impact of the change occurs in the following plan year 
under the rules for determining the presumed AFTAP in that following 
year.
    The regulations specify that a change in an AFTAP that is not a 
material change as described in the preceding paragraph is an 
immaterial change. In addition, the regulations provide that if the 
difference between the AFTAP for a plan year and the later revised 
determination of that percentage is the result of certain specified 
actions, then the change in the AFTAP is deemed to be an immaterial 
change. The proposed regulations would have provided that the specified 
actions are additional contributions for the preceding year or a plan 
sponsor's election to reduce the prefunding or funding standard 
carryover balance after the date of the certification. The final 
regulations add to this list, including adding a plan sponsor's 
election to apply the prefunding balance or funding standard carryover 
balance to offset the prior plan year's minimum required contribution, 
a change in funding method or actuarial assumptions (where such change 
required actual approval of the Commissioner, rather than deemed 
approval), and an unpredictable contingent event or plan amendment for 
which a section 436 contribution was made.
    The final regulations provide rules requiring a recertification of 
the AFTAP in certain situations. For example, if the plan would have a 
material change in the AFTAP as a result of one of the changes 
described in the prior paragraph, the change is deemed immaterial only 
if the actuary recertifies the AFTAP for the plan year as soon as 
practicable thereafter, taking into account the relevant event. 
Similarly, if the plan sponsor is making a section 436 contribution in 
the amount needed to bring the AFTAP up to a relevant threshold (60 or 
80 percent), then the actuary must recertify the AFTAP as 60 or 80 
percent. The regulations also provide that the plan administrator is 
permitted to request an updated certification of AFTAP in other 
situations, such as where the employer makes a section 436 contribution 
in the amount of the increase in the funding target attributable to the 
unpredictable contingent event benefits or the plan amendment.
    The regulations provide that a material change will result in the 
plan not satisfying the qualification rules. If the plan was operated 
in accordance with the prior certification of the AFTAP for the plan 
year, the plan will not have satisfied the requirements of section 
401(a)(29) and section 436. In the case of a material change where the 
plan was operated in accordance with the subsequent certification of 
the AFTAP during the period of time the prior certification applied, 
then the plan will not have been operated in accordance with its terms. 
Furthermore, the regulations provide that the rules requiring 
application of a presumed AFTAP under section 436(h) continue to apply 
from and after the date of the prior certification until the date of 
the subsequent certification.
    The final regulations provide that, in the case of an immaterial 
change, the revised percentage applies prospectively. For this purpose, 
in the case of a change that would be a material change but for the 
rule deeming it to be an immaterial change, the revised percentage must 
be applied beginning with the date of the event that gave rise to the 
need for the updated certification. As under the proposed regulations, 
an immaterial change does not change the inapplicability of the 
presumptions under section 436(h) for the plan year prior to the date 
of the subsequent certification.
I. Determination of Adjusted Funding Target Attainment Percentage
    For purposes of section 436, the funding target means the funding 
target under section 430(d) or section 430(i), as applicable to the 
plan for a plan year, and the FTAP is determined under the same rules 
that apply under section 430(d).
    The AFTAP for any plan year is the fraction (expressed as a 
percentage), the numerator of which is the adjusted plan assets and the 
denominator of which is the adjusted funding target. The adjusted plan 
assets equals the value of plan assets, decreased by the plan's funding 
standard carryover balance and prefunding balance and increased by the 
aggregate amount of purchases of annuities for participants and 
beneficiaries (other than participants who, at the time of the 
purchase, were highly compensated employees (as defined in section 
414(q), which definition includes highly compensated former employees 
described in Sec.  1.414(q)-1T, Q&A-4)) which were made by the plan 
during the preceding 2 plan years, to the extent not included in plan 
assets under section 430. The final regulations provide that the 
adjusted funding target equals the funding target for the plan year 
(determined without regard to the at-risk rules under section 430(i)), 
increased by the same annuity purchases that were added to the assets 
in determining adjusted plan assets.
    If the FTAP for a plan year, determined without regard to the 
subtraction of the funding standard carryover balance and the 
prefunding balance from the value of plan assets in accordance with 
section 436(f), would be 100 percent or more, then, for purposes of 
section 436, the value of net plan assets used in the determination of 
the FTAP (and hence the AFTAP) is

[[Page 53034]]

determined without regard to any subtraction of funding balances under 
section 430(f)(4). The final regulations reflect the transition rule of 
section 436(j)(3)(B) under which a lower percentage is substituted for 
100 percent for purposes of the rule described in the preceding 
sentence. However, this transition is only available if the plan's FTAP 
for each prior year is above the transition percentage. This latter 
requirement was unchanged by WRERA.
    The final regulations also provide rules for determining the AFTAP 
for the prior plan year in the case of the first plan year beginning in 
2008. These rules are the same as under the proposed regulations, 
except that the proposed regulations would have allowed the special 
rules to apply to the first effective plan year (which could be later 
than 2008 in the case of a plan described in sections 104 through 106 
of PPA '06).
    Under the rules for determining the AFTAP for the plan year 
preceding the first plan year beginning in 2008, the FTAP for the 
preceding plan year is determined by substituting the current liability 
for the funding target. The transition rules for determining the value 
of plan assets are the same under section 436 as apply under section 
430(d). Thus, the value of plan assets is determined under section 
412(c)(2) as in effect for the 2007 plan year (except that the value of 
plan assets prior to subtraction of the plan's funding standard account 
credit balance described below can neither be less than 90 percent of 
the fair market value of plan assets nor greater than 110 percent of 
the fair market value of plan assets on the valuation date for that 
plan year). If a plan has a funding standard account credit balance as 
of the valuation date for the 2007 plan year, that balance must be 
subtracted from the asset value described in this preamble as of that 
date (unless the value of plan assets is greater than or equal to 90 
percent of the plan's current liability determined under section 
412(l)(7) (as in effect prior to PPA '06) on the valuation date for the 
2007 plan year). However, if the employer makes an election to reduce 
some or all of the funding standard carryover balance as of the first 
day of the first plan year beginning in 2008 in accordance with section 
430(f)(5), then the present value (determined as of the valuation date 
for the prior plan year using the valuation interest rate for that 
prior year) of the amount so reduced is not treated as part of the 
funding standard account credit balance when that balance is subtracted 
from the value of net plan assets.
    In any case in which the plan's enrolled actuary has not issued a 
certification of the AFTAP of the plan for the 2007 plan year using 
this rule, the AFTAP of the plan for the first plan year beginning in 
2008 is presumed to be less than 60 percent until the AFTAP of the plan 
for the 2007 plan year has been certified or the AFTAP of the plan for 
the first plan year beginning in 2008 has been certified. This rule 
applies for purposes of sections 436(b) and 436(c) at the beginning of 
the first plan year beginning in 2008 and applies for purposes of 
sections 436(d) and 436(e) as of the first day of the 4th month of the 
first plan year beginning in 2008. The special rules permitting range 
certifications for plan years beginning after 2007 do not apply to the 
2007 plan year.
    The final regulations differ from the proposed regulations in the 
transition rules that apply for the determination of a plan's AFTAP for 
the pre-effective plan year in the case of a plan described in sections 
104 through 106 of PPA '06. In such a case, the AFTAP is determined for 
that plan year in the same manner as for a plan to which section 430 
applies to determine the plan's minimum required contribution, except 
that the value of plan assets that forms the FTAP numerator is 
determined without subtraction of the funding standard carryover 
balance or the credit balance under the funding standard account.\9\
---------------------------------------------------------------------------

    \9\ Section 436(m) provides for special rules to apply in 
determining a plan's AFTAP for the preceding plan year only for plan 
years beginning during 2008. Accordingly, the regulations limit the 
use of the special rule under which the plan's FTAP is determined 
based on the plan's current liability to the determination of the 
plan's FTAP for the 2007 plan year, even for a plan described in 
sections 104 through 106 of PPA '06 for which section 430 does not 
apply for purposes of determining a plan's minimum required 
contribution until a plan year after the 2008 plan year.
---------------------------------------------------------------------------

    The regulations do not include any special rules authorized under 
section 436(k) (relating to the determination of the AFTAP for a plan 
that uses a valuation date other than the first day of the plan year). 
Those rules, based on the rules described in Notice 2008-21, will be 
included in future proposed regulations. See Sec.  601.601(d)(2) 
relating to objectives and standards for publishing regulations, 
revenue rulings and revenue procedures in the Internal Revenue 
Bulletin.
J. Timeliness of Certification of a Plan's AFTAP
    A number of comments were received raising issues concerning 
potential delays in the completion and delivery of a certification of 
the plan's AFTAP by the plan's enrolled actuary. In particular, 
commenters asked whether there was any legal obligation to provide a 
certification, whether an actuary could intentionally delay providing 
the certification, and whether the plan administrator could direct the 
certification to be delayed (or delay requesting a certification where 
the plan's actuary would not provide a certification until so requested 
by the plan administrator). These final regulations do not include any 
special rules relating to these comments, but these comments may be 
considered in connection with future proposed regulations. In addition, 
the Treasury Department and the IRS will be coordinating with the 
Department of Labor to consider the circumstances in which the power to 
delay issuance of a certification may result in fiduciary 
responsibilities in the administration of the plan, rather than being 
merely ministerial.
    Section 1.411(d)-4, Q&A-4(a) provides generally that a plan that 
permits the employer, either directly or indirectly, through the 
exercise of discretion, to deny a participant a section 411(d)(6) 
protected benefit provided under the plan for which the participant is 
otherwise eligible violates the requirements of section 411(d)(6). In 
addition, pursuant to that regulation, a plan that permits employer 
discretion to deny the availability of a section 411(d)(6) protected 
benefit violates the definitely determinable requirement of section 
401(a). Section 1.411(d)-4, Q&A-4(b) provides an exception to this 
general rule for limited discretion with respect to the ministerial or 
mechanical administration of the plan. Section 1.411(d)-4, Q&A-6(b) 
provides that a plan may not limit the availability of section 
411(d)(6) protected benefits permitted under the plan based on 
objective conditions that are within the employer's discretion. As an 
example of such a provision, the regulation states that the 
availability of section 411(d)(6) protected benefits in a plan may not 
be conditioned on a determination with respect to the level of the 
plan's funded status because the amount of the plan's funding is within 
the employer's discretion.
    Future proposed regulations are expected to address the interaction 
of the rules of section 436 and the rules of Sec.  1.411(d)-4 that 
relate to employer discretion. These future proposed regulations are 
expected to conform the rules of Sec.  1.411(d)-4, Q&A-6(b), regarding 
employer discretion in plan funding to the requirements of section 436. 
These future proposed regulations

[[Page 53035]]

are also expected to address the extent to which Sec.  1.411(d)-4, Q&A-
4(b) (under which a plan may permit limited discretion with respect to 
ministerial acts) applies with respect to the certification of the 
plan's AFTAP.

Effective/Applicability Date

    The final regulations under section 430 apply to plan years 
beginning on or after January 1, 2010, regardless of whether section 
430 applies to determine the minimum required contribution for the plan 
year. For plan years beginning before January 1, 2010, plans are 
permitted to rely on these final regulations for purposes of satisfying 
the requirements of section 430. This reliance applies section by 
section under the final regulations. Alternatively, for plan years 
beginning before January 1, 2010, plans are permitted to rely on the 
proposed regulations under section 430(d), (f), (g), (h)(2), and (i) 
(REG-139236-07, 72 FR 74215; REG-113891-07, 72 FR 50544) for purposes 
of applying the rules of section 430.
    Section 436 generally applies to plan years beginning on or after 
January 1, 2008. The applicability of section 436 for purposes of 
determining the minimum required contribution is delayed for certain 
plans in accordance with sections 104 through 106 of PPA '06. In the 
case of a collectively bargained plan that is maintained pursuant to 
one or more collective bargaining agreements between employee 
representatives and one or more employers ratified before January 1, 
2008, section 436 does not apply to plan years beginning before the 
earlier of January 1, 2010, or the later of the date on which the last 
such collective bargaining agreement relating to the plan terminates 
\10\ (determined without regard to any extension thereof agreed to 
after August 17, 2006), or the first day of the first plan year to 
which section 436 would otherwise apply. In the case of a plan with 
respect to which a collective bargaining agreement applies to some, but 
not all, of the plan participants, the plan is considered a 
collectively bargained plan if it is considered a collectively 
bargained plan under the rules that apply for purposes of section 
436(f)(3)(C) described in section VII.A.7 of this preamble.
---------------------------------------------------------------------------

    \10\ As provided in section 113(b)(2) of PPA '06, any plan 
amendment made pursuant to a collective bargaining agreement 
relating to the plan which amends the plan solely to conform to any 
requirement added by section 436 is not treated as a termination of 
the collective bargaining agreement.
---------------------------------------------------------------------------

    The final regulations under section 436 apply to plan years 
beginning on or after January 1, 2010. For plan years beginning before 
January 1, 2010, plans are permitted to rely on the provisions set 
forth in these final regulations for purposes of satisfying the 
requirements of section 436. Alternatively, for plan years beginning 
before January 1, 2010, plans are permitted to rely on the proposed 
regulations under section 436 (REG-113891-07, 72 FR 50544) for purposes 
of satisfying the requirements of section 436.

Section 1107 of PPA '06 and Code Section 411(d)(6)

    Under section 1107 of PPA '06, a plan sponsor is permitted to delay 
adopting a plan amendment pursuant to the enactment of section 436 (or 
pursuant to these regulations) until the last day of the first plan 
year beginning on or after January 1, 2009. If section 1107 of PPA '06 
applies to an amendment of a plan, section 1107 provides that the plan 
does not fail to meet the requirements of section 411(d)(6) by reason 
of such amendment, except as otherwise provided by the Secretary of the 
Treasury.\11\ For example, section 411(d)(6) relief would be available 
for plan amendments that would prohibit single sum or other optional 
forms of benefit that include prohibited payments if the plan's AFTAP 
was less than 60 percent, in accordance with section 436(d) and Sec.  
1.436-1(d) of these regulations. The IRS and the Treasury Department 
are reviewing whether sample plan amendments should be issued with 
respect to section 436 and the Sec.  1.436-1 regulations.
---------------------------------------------------------------------------

    \11\ Except to the extent permitted under section 411(d)(6) and 
Sec.  1.411(d)-3 or 1.411(d)-4, or under a statutory provision such 
as section 1107 of PPA '06, section 411(d)(6) prohibits a plan 
amendment that decreases a participant's accrued benefits or that 
has the effect of eliminating or reducing an early retirement 
benefit or retirement-type subsidy, or eliminating an optional form 
of benefit, with respect to benefits attributable to service before 
the amendment. However, an amendment that eliminates or decreases 
benefits that have not yet accrued does not violate section 
411(d)(6), provided that the amendment is adopted and effective 
before the benefits accrue.
---------------------------------------------------------------------------

Special Analyses

    It has been determined that this Treasury Decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It has also been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations. It is hereby 
certified that the collection of information imposed by these 
regulations will not have a significant economic impact on a 
substantial number of small entities. The estimated burden imposed by 
the collection of information contained in these regulations is 1.5 
hours per respondent. Moreover, most of this burden is attributable to 
the requirement for a qualified defined benefit plan's enrolled actuary 
to provide a timely certification of the plan's AFTAP for each plan 
year to avoid certain benefit restrictions, which is imposed by section 
436(h) of the Code. In addition, these regulations provide for several 
written elections to be made by the plan sponsor upon occasion; these 
written elections will require minimal time to prepare. Accordingly, a 
regulatory flexibility analysis is not required. Pursuant to section 
7805(f) of the Code, the notice of proposed rulemaking preceding these 
regulations was submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

Drafting Information

    The principal authors of these regulations are Michael P. Brewer, 
Lauson C. Green, and Linda S.F. Marshall, Office of Division Counsel/
Associate Chief Counsel (Tax Exempt and Government Entities). However, 
other personnel from the IRS and the Treasury Department participated 
in the development of these regulations.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *


0
Par. 2. Section 1.430(d)-1 is added to read as follows:


Sec.  1.430(d)-1  Determination of target normal cost and funding 
target.

    (a) In general--(1) Overview. This section sets forth rules for 
determining a plan's target normal cost and funding target under 
sections 430(b) and 430(d), including guidance relating to the rules 
regarding actuarial assumptions under sections 430(h)(1), 430(h)(4), 
and 430(h)(5). Section 430 and this section

[[Page 53036]]

apply to single employer defined benefit plans (including multiple 
employer plans as defined in section 413(c)) that are subject to 
section 412, but do not apply to multiemployer plans (as defined in 
section 414(f)). For further guidance on actuarial assumptions, see 
Sec.  1.430(h)(2)-1 (relating to interest rates) and Sec. Sec.  
1.430(h)(3)-1 and 1.430(h)(3)-2 (relating to mortality tables). See 
also Sec.  1.430(i)-1 for the determination of the funding target and 
the target normal cost for a plan that is in at-risk status.
    (2) Organization of regulation. Paragraph (b) of this section sets 
forth certain definitions that apply for purposes of section 430. 
Paragraph (c) of this section provides rules regarding which benefits 
are taken into account in determining a plan's target normal cost and 
funding target. Paragraph (d) of this section sets forth the rules 
regarding the plan provisions that are taken into account in making 
these determinations, and paragraph (e) of this section provides rules 
on the plan population that is taken into account for this purpose. 
Paragraph (f) of this section provides rules relating to the actuarial 
assumptions and the plan's funding method that are used to determine 
present values. Paragraph (g) of this section contains effective/
applicability dates and transition rules.
    (3) Special rules for multiple employer plans. In the case of a 
multiple employer plan to which section 413(c)(4)(A) applies, the rules 
of section 430 and this section are applied separately for each 
employer under the plan, as if each employer maintained a separate 
plan. Thus, the plan's funding target and target normal cost are 
computed separately for each employer under such a multiple employer 
plan. In the case of a multiple employer plan to which section 
413(c)(4)(A) does not apply (that is, a plan described in section 
413(c)(4)(B) that has not made the election for section 413(c)(4)(A) to 
apply), the rules of section 430 and this section are applied as if all 
participants in the plan were employed by a single employer.
    (b) Definitions--(1) Target normal cost--(i) In general. For a plan 
that is not in at-risk status under section 430(i) for a plan year, 
subject to the adjustments described in paragraph (b)(1)(iii) of this 
section, the target normal cost of the plan for the plan year is the 
present value (determined as of the valuation date) of all benefits 
under the plan that accrue during, are earned during, or are otherwise 
allocated to service for the plan year under the applicable rules of 
this section, including paragraph (c)(1)(ii)(B), (C), or (D) of this 
section. See Sec.  1.430(i)-1(d) and (e)(2) for the determination of 
the target normal cost for a plan that is in at-risk status.
    (ii) Benefits allocated to a plan year. The benefits that accrue, 
are earned, or are otherwise allocated to service for the plan year are 
based on the actual benefits accrued, earned, or otherwise allocated to 
service for the plan year through the valuation date and benefits 
expected to accrue, be earned, or be otherwise allocated to service for 
the plan year for the period from the valuation date through the end of 
the plan year. The benefits that are allocated to the plan year under 
the rules of paragraph (c) of this section include any increase in 
benefits during the plan year that is attributable to increases in 
compensation for the current plan year even if that increase in 
benefits is with respect to benefits attributable to service performed 
in a preceding plan year. In addition, the benefits that are allocated 
to the plan year under the rules of paragraph (c) of this section 
include any increase in benefits during the plan year that arises on 
account of mandatory employee contributions (within the meaning of 
Sec.  1.411(c)-1(c)(4)) that are made during the plan year.
    (iii) Special adjustments--(A) In general. The target normal cost 
of the plan for the plan year (determined under paragraph (b)(1)(i) of 
this section) is adjusted (not below zero) by adding the amount of 
plan-related expenses expected to be paid from plan assets during the 
plan year and subtracting the amount of mandatory employee 
contributions (within the meaning of Sec.  1.411(c)-1(c)(4)) that are 
expected to be made during the plan year.
    (B) Plan-related expenses. [Reserved]
    (2) Funding target. For a plan that is not in at-risk status under 
section 430(i) for a plan year, the funding target of the plan for the 
plan year is the present value (determined as of the valuation date) of 
all benefits under the plan that have been accrued, earned, or 
otherwise allocated to years of service prior to the first day of the 
plan year under the applicable rules of this section, including 
paragraph (c)(1)(ii)(B), (C), or (D) of this section. See Sec.  
1.430(i)-1(c) and (e)(1) for the determination of the funding target 
for a plan that is in at-risk status.
    (3) Funding target attainment percentage--(i) In general. Except as 
otherwise provided in this paragraph (b)(3), the funding target 
attainment percentage of a plan for a plan year is a fraction 
(expressed as a percentage)--
    (A) The numerator of which is the value of plan assets for the plan 
year (determined under the rules of Sec.  1.430(g)-1) after subtraction 
of the prefunding balance and the funding standard carryover balance 
under section 430(f)(4)(B) and Sec.  1.430(f)-1(c); and
    (B) The denominator of which is the funding target of the plan for 
the plan year (determined without regard to the at-risk rules of 
section 430(i) and Sec.  1.430(i)-1).
    (ii) Determination of funding target attainment percentage for 
plans with delayed effective dates. If section 430 does not apply for 
purposes of determining the plan's minimum required contribution for a 
plan year that begins on or after January 1, 2008 (as is the case for a 
plan described in section 104, 105, or 106 of the Pension Protection 
Act of 2006 (PPA '06), Public Law 109-280 (120 Stat. 780)), then the 
funding target attainment percentage is determined for that plan year 
in accordance with the rules of paragraph (b)(3)(i) of this section in 
the same manner as for a plan to which section 430 applies to determine 
the plan's minimum required contribution, except that the value of plan 
assets that forms the numerator under paragraph (b)(3)(i)(A) of this 
section is determined without subtraction of the funding standard 
carryover balance or the credit balance under the funding standard 
account.
    (iii) Special rule for plans with zero funding target. If the 
funding target of the plan is equal to zero for a plan year, then the 
funding target attainment percentage under this paragraph (b)(3) is 
equal to 100 percent for the plan year.
    (4) Present value. The present value of a benefit (including a 
portion of a benefit) with respect to a participant that is taken into 
account under the rules of paragraph (c) of this section is determined 
as of the valuation date by multiplying the amount of that benefit by 
the probability that the benefit will be paid at a future date and then 
discounting the resulting product using the appropriate interest rate 
under Sec.  1.430(h)(2)-1. The probability that the benefit will be 
paid with respect to the participant at such future date is determined 
using the actuarial assumptions that satisfy the standards of paragraph 
(f) of this section as to the probability of future service, 
advancement in age, and other events (such as death, disability, 
termination of employment, and selection of optional form of benefit) 
that affect whether the participant or beneficiary will be eligible for 
the benefit and whether the benefit will be paid at that future date.
    (c) Benefits taken into account--(1) In general--(i) Benefits 
earned or accrued. The benefits taken into account in determining the 
target normal cost and

[[Page 53037]]

the funding target under paragraph (b) of this section are all benefits 
earned or accrued under the plan that have not yet been paid as of the 
valuation date, including retirement-type and ancillary benefits 
(within the meaning of Sec.  1.411(d)-3(g)). The benefits taken into 
account are based on the participant's or beneficiary's status (such as 
active employee, vested or partially vested terminated employee, or 
disabled participant) as of the valuation date, and those benefits are 
allocated to the funding target or the target normal cost under 
paragraph (c)(1)(ii) of this section.
    (ii) Allocation of benefits--(A) In general. To the extent that the 
amount of a participant's benefit that is expected to be paid is a 
function of the accrued benefit, the allocation of the benefit for 
purposes of determining the funding target and the target normal cost 
is made using the rules of paragraph (c)(1)(ii)(B) of this section. To 
the extent that the amount of a participant's benefit that is expected 
to be paid is not a function of the accrued benefit, but is a function 
of the participant's years of service (or is the excess of a function 
of the participant's years of service over a function of the 
participant's accrued benefit), the allocation of the benefit for 
purposes of determining the funding target and the target normal cost 
is made using the rules of paragraph (c)(1)(ii)(C) of this section. To 
the extent that the amount of a participant's benefit that is expected 
to be paid is not allocated under the rules of paragraph (c)(1)(ii)(B) 
or (C) of this section, the allocation of the benefit for purposes of 
determining the funding target and the target normal cost is made using 
the rules of paragraph (c)(1)(ii)(D) of this section.
    (B) Benefits that are based on accrued benefits. If the allocation 
of the benefit for purposes of determining the funding target and the 
target normal cost is made under this paragraph (c)(1)(ii)(B), then the 
portion of a participant's benefit that is taken into account in the 
funding target for a plan year is determined by applying the function 
to the accrued benefit as of the first day of the plan year, and the 
portion of the benefit that is taken into account in determining the 
target normal cost for the plan year is determined by applying that 
function to the increase in the accrued benefit during the plan year. 
For example, a benefit that is assumed to be payable at a particular 
early retirement age in the amount of 90 percent of the accrued benefit 
is taken into account in the funding target in the amount of 90 percent 
of the accrued benefit as of the beginning of the plan year, and that 
benefit is taken into account in the target normal cost in the amount 
of 90 percent of the increase in the accrued benefit during the plan 
year.
    (C) Benefits that are based on service. If the allocation of the 
benefit for purposes of determining the funding target and the target 
normal cost is made under this paragraph (c)(1)(ii)(C), then the 
portion of a participant's benefit that is taken into account in 
determining the funding target for a plan year is determined by 
applying the function to the participant's years of service as of the 
first day of the plan year, and the portion of the benefit that is 
taken into account in determining the target normal cost for the plan 
year is determined by applying that function to the increase in the 
participant's years of service during the plan year. For example, if a 
plan provides a post-retirement death benefit of $500 per year of 
service, then the funding target is determined based on a death benefit 
of $500 multiplied by a participant's years of service at the beginning 
of the year, and if the participant earns or is expected to earn a full 
year of service during the plan year, the target normal cost is based 
on the additional $500 in death benefits attributable to that 
additional year of service.
    (D) Other benefits. If the allocation of the benefit for purposes 
of determining the funding target and the target normal cost is made 
under this paragraph (c)(1)(ii)(D), then the portion of a participant's 
benefit that is taken into account in determining the funding target 
for a plan year is equal to the total benefit multiplied by the ratio 
of the participant's years of service as of the first day of the plan 
year to the years of service the participant will have at the time of 
the event that causes the benefit to be payable (whether the benefit is 
expected to be paid at the time of that decrement or at a future time), 
and the portion of the benefit that is taken into account in 
determining the target normal cost for the plan year is the increase in 
the proportionate benefit attributable to the increase in the 
participant's years of service during the plan year. For example, if a 
plan provides a Social Security supplement for a participant who 
retires after 30 years of service that is equal to a participant's 
Social Security benefit, the funding target with respect to the benefit 
payable beginning at a particular age (which reflects the probability 
of retirement at that age) is determined based on the projected Social 
Security benefit payable at the particular age multiplied by a 
fraction, the numerator of which is the participant's years of service 
as of the first day of the plan year and the denominator of which is 
the participant's projected years of service at the particular age. In 
such a case, if the participant earns or is expected to earn a full 
year of service during the plan year, the target normal cost is 
determined based on the projected Social Security benefit payable at 
the particular age multiplied by a fraction, the numerator of which is 
one and the denominator of which is the participant's projected years 
of service at the particular age.
    (iii) Application of section 436 limitations to funding target and 
target normal cost determination--(A) Effect of limitation on 
unpredictable contingent event benefits. The determination of the 
funding target and the target normal cost of a plan for a plan year 
must take into account any limitation on unpredictable contingent event 
benefits under section 436(b) with respect to unpredictable contingent 
events which occurred before the valuation date, but must not take into 
account anticipated funding-based limitations on unpredictable 
contingent event benefits under section 436(b) with respect to 
unpredictable contingent events which are expected to occur on or after 
the valuation date.
    (B) Effect of limitation on applicability of plan amendments. See 
paragraph (d) of this section for rules regarding the treatment of plan 
amendments that take effect during the plan year taking into account 
the restrictions under section 436(c).
    (C) Effect of limitation on prohibited payments. The determination 
of the funding target and the target normal cost of a plan for a plan 
year must take into account any limitation on prohibited payments under 
section 436(d) with respect to any annuity starting date that was 
before the valuation date, but must not take into account any 
limitation on prohibited payments under section 436(d) for any annuity 
starting date on or after the valuation date (however, the 
determination must take into account benefit distributions under plan 
provisions that allow new annuity starting dates with respect to 
distributions that were limited under section 436(d)).
    (D) Effect of limitation on benefit accruals. Except as otherwise 
provided in this paragraph (c)(1)(iii)(D), the determination of the 
funding target of a plan for a plan year must take into account any 
limitation on benefit accruals under section 436(e) applicable before 
the valuation date. However, if the plan terms provide for the 
automatic restoration of benefit accruals as permitted under Sec.  
1.436-1(a)(4)(ii)(B), and the restoration of benefits as of the 
valuation date will not be treated as resulting from a plan amendment 
under

[[Page 53038]]

the rules of Sec.  1.436-1(c)(3) (because the period of limitation as 
of the valuation date does not exceed 12 months and the adjusted 
funding target attainment percentage for the plan would not be less 
than 60 percent taking into account the restored benefit accruals), 
then the determination of the funding target of a plan for a plan year 
must not take into account the limitation on benefit accruals under 
section 436(e) for that period. The determination of the target normal 
cost of a plan for a plan year must not take into account any 
limitation on benefit accruals under section 436(e). Thus, if an 
employer wishes to take a plan freeze into account in determining the 
target normal cost, the plan must be specifically amended to cease 
accruals.
    (iv) Effect of other limitations of benefits--(A) Liquidity 
shortfalls. The determination of the funding target and the target 
normal cost of a plan for a plan year must take into account any 
restrictions on payments under section 401(a)(32) on account of a 
liquidity shortfall (as defined in section 430(j)(4)) for periods 
preceding the valuation date. The determination of the funding target 
and the target normal cost must not take into account any restrictions 
on payments under section 401(a)(32) on account of a liquidity 
shortfall or possible liquidity shortfall for any period on or after 
the valuation date.
    (B) High 25 limitation. The determination of the funding target and 
the target normal cost of a plan for a plan year must take into account 
any restrictions on payments under Sec.  1.401(a)(4)-5(b) to highly 
compensated employees to the extent that benefits were not paid or will 
not be paid because of a limitation that applied prior to the valuation 
date. If a benefit that was otherwise restricted was paid prior to the 
valuation date but with suitable security (such as an escrow account) 
provided to the plan in the event of a plan termination, the benefit is 
treated as distributed for purposes of section 430 and this section. 
Accordingly, the funding target does not include any liability for the 
benefit and the plan assets do not include the security. The 
determination of the funding target and the target normal cost of a 
plan for a plan year must not take into account any restrictions on 
payments under Sec.  1.401(a)(4)-5(b) to highly compensated employees 
that are anticipated with respect to annuity starting dates on or after 
the valuation date on account of the funded status of the plan.
    (2) Benefits provided by insurance--(i) General rule. A plan 
generally is required to reflect in the plan's funding target and 
target normal cost the liability for benefits that are funded through 
insurance contracts held by the plan, and to include the corresponding 
insurance contracts in plan assets. Paragraph (c)(2)(ii) of this 
section sets forth an alternative to this general approach. A plan's 
treatment of benefits funded through insurance contracts pursuant to 
this paragraph (c)(2) is part of the plan's funding method. 
Accordingly, that treatment can be changed only with the consent of the 
Commissioner.
    (ii) Separate funding of insured benefits. As an alternative to the 
treatment described in paragraph (c)(2)(i) of this section, in the case 
of benefits that are funded through insurance contracts, the liability 
for benefits provided under such contracts is permitted to be excluded 
from the plan's funding target and target normal cost, provided that 
the corresponding insurance contracts are excluded from plan assets. 
This treatment is only available with respect to insurance purchased 
from an insurance company licensed under the laws of a State and only 
to the extent that a participant's or beneficiary's right to receive 
those benefits is an irrevocable contractual right under the insurance 
contracts, based on premiums paid to the insurance company prior to the 
valuation date. For example, in the case of a retired participant 
receiving benefits from an annuity contract in pay status under which 
no premiums are required on or after the valuation date, the liability 
for benefits provided by the contract is permitted to be excluded from 
the plan's funding target provided that the value of the contract is 
also excluded from the value of plan assets. Similarly, in the case of 
an active or deferred vested participant whose benefits are funded by a 
life insurance or annuity contract under which further premiums are 
required on or after the valuation date, the liability for benefits, if 
any, that would be paid from the contract if no further premiums were 
to be paid (for example, if the contract were to go on reduced paid-up 
status) is permitted to be excluded from the plan's funding target and 
target normal cost, provided that the value of the contract is excluded 
from the value of plan assets. By contrast, if the plan trustee can 
surrender a contract to the insurer for its cash value, then the 
participant's or beneficiary's right to receive those benefits is not 
an irrevocable contractual right and, therefore, the liability for 
benefits provided under the contract must be taken into account in 
determining the plan's funding target and target normal cost and the 
contracts cannot be excluded from plan assets.
    (d) Plan provisions taken into account--(1) General rule--(i) Plan 
provisions adopted by valuation date. Except as otherwise provided in 
this paragraph (d), a plan's funding target and target normal cost for 
a plan year are determined based on plan provisions that are adopted no 
later than the valuation date for the plan year and that take effect on 
or before the last day of the plan year. For example, in the case of a 
plan amendment adopted on or before the valuation date for the plan 
year that has an effective date occurring in the current plan year, the 
plan amendment is taken into account in determining the funding target 
and the target normal cost for the current plan year if it is permitted 
to take effect under the rules of section 436(c) for the current plan 
year, but the amendment is not taken into account for the current plan 
year if it does not take effect until a future plan year.
    (ii) Plan provisions adopted after valuation date. If a plan 
administrator makes the election described in section 412(d)(2) with 
respect to a plan amendment, then the plan amendment is treated as 
having been adopted on the first day of the plan year for purposes of 
this paragraph (d). Section 412(d)(2) applies to any plan amendment 
adopted no later than 2\1/2\ months after the close of the plan year, 
including an amendment adopted during the plan year. Thus, if an 
amendment is adopted after the valuation date for a plan year (and no 
later than 2\1/2\ months after the close of the plan year), but takes 
effect by the last day of the plan year, the amendment is taken into 
account in determining the plan's funding target and target normal cost 
for the plan year if the plan administrator makes the election 
described in section 412(d)(2) with respect to such amendment.
    (iii) Determination of when an amendment takes effect. For purposes 
of this paragraph (d)(1), the determination of whether an amendment 
that increases benefits takes effect and when it takes effect is 
determined in accordance with the rules of section 436(c) and Sec.  
1.436-1(c)(5). For purposes of this paragraph (d)(1), in the case of an 
amendment that decreases benefits, the amendment takes effect under a 
plan on the first date on which the benefits of any individual who is 
or could be a participant or beneficiary under the plan would be less 
than those benefits would be under the pre-amendment plan provisions if 
the individual were on that date to satisfy the applicable conditions 
for the benefits. In either case, the

[[Page 53039]]

determination of when an amendment takes effect is unaffected by an 
election under section 412(d)(2).
    (2) Special rule for certain amendments increasing liabilities. In 
the case of a plan amendment that is not required to be taken into 
account under the rules of paragraph (d)(1) of this section because it 
is adopted after the valuation date for the plan year, the plan 
amendment must be taken into account in determining a plan's funding 
target and target normal cost for the plan year if the plan amendment--
    (i) Takes effect by the last day of the plan year;
    (ii) Increases the liabilities of the plan by reason of increases 
in benefits, establishment of new benefits, changing the rate of 
benefit accrual, or changing the rate at which benefits become 
nonforfeitable; and
    (iii) Would not be permitted to take effect under the rules of 
section 436(c) if those rules were applied--
    (A) By treating the increase in the target normal cost for the plan 
year attributable to the amendment (and all other amendments that must 
be taken into account solely because of the application of the rules in 
this paragraph (d)(2)) as if the increase were an increase in the 
funding target for the plan year; and
    (B) By taking into account all unpredictable contingent event 
benefits permitted to be paid for unpredictable contingent events that 
occurred during the current plan year and all plan amendments that took 
effect in the current plan year (including all amendments to which this 
paragraph (d)(2) applies for the plan year).
    (3) Allocation of benefits attributable to plan amendments. If a 
plan amendment is taken into account for a plan year under the rules of 
this paragraph (d), then the allocation of benefits that is used to 
determine the funding target and the target normal cost for that plan 
year is based on the plan as amended. Thus, if an amendment that is 
taken into account for a plan year increases a participant's accrued 
benefit for service prior to the beginning of the plan year, then the 
present value of that increase is included in the funding target for 
the plan year.
    (e) Plan population taken into account--(1) In general. In making 
any determination of the funding target or target normal cost under 
paragraph (b) of this section, the plan population is determined as of 
the valuation date. The plan population must include three classes of 
individuals--
    (i) Participants currently employed in the service of the employer;
    (ii) Participants who are retired under the plan or who are 
otherwise no longer employed in the service of the employer; and
    (iii) All other individuals currently entitled to benefits under 
the plan.
    (2) Assumption regarding rehiring of former employees--(i) Special 
exclusion for ``rule of parity'' cases. Certain individuals may be 
excluded from the class of individuals described in paragraph 
(e)(1)(ii) of this section. The excludable individuals are those former 
employees who, prior to the valuation date for the plan year, have 
terminated service with the employer without vested benefits and whose 
service might be taken into account in future years because the ``rule 
of parity'' of section 411(a)(6)(D) does not permit that service to be 
disregarded. However, if the plan's experience as to separated 
employees returning to service has been such that the exclusion 
described in this paragraph (e)(2) would be unreasonable, then no such 
exclusion is permitted.
    (ii) Application to partially vested participants. Whether former 
employees who are terminated with partially vested benefits are assumed 
to return to service is determined under the same rules that apply to 
former employees without vested benefits under paragraph (e)(2)(i) of 
this section.
    (3) Anticipated future participants. In making any determination of 
the funding target or target normal cost under paragraph (b) of this 
section, the actuarial assumptions and funding method used for the plan 
must not anticipate the affiliation with the plan of future 
participants not employed in the service of the employer on the plan's 
valuation date. However, any such determination may anticipate the 
affiliation with the plan of current employees who have not yet 
satisfied the participation (age and service) requirements of the plan 
as of the valuation date.
    (f) Actuarial assumptions and funding method used in determination 
of present value--(1) Selection of actuarial assumptions and funding 
method--(i) General rules. The determination of any present value or 
other computation under section 430 and this section must be made on 
the basis of actuarial assumptions and a funding method. Except as 
otherwise specifically provided (for example, in Sec.  1.430(h)(2)-
1(b)(6) or section 4006(a)(3)(E)(iv) of the Employee Retirement Income 
Security Act of 1974, as amended (ERISA)), the same actuarial 
assumptions and funding method must be used for all computations under 
sections 430 and 436. For example, the actuarial assumptions and the 
funding method used in making a certification of the adjusted funding 
target attainment percentage for a plan year must be the same as those 
disclosed on the actuarial report under section 6059 (Schedule SB, 
``Single-Employer Defined Benefit Plan Actuarial Information'' of Form 
5500, ``Annual Return/Report of Employee Benefit Plan'').
    (ii) Changes in actuarial assumptions and funding method. Actuarial 
assumptions established for a plan year cannot subsequently be changed 
for that plan year unless the Commissioner determines that the 
assumptions that were used are unreasonable. Similarly, a funding 
method established for a plan year cannot subsequently be changed for 
that plan year unless the Commissioner determines that the use of that 
funding method for that plan year is impermissible.
    (iii) Procedures for establishing actuarial assumptions and funding 
method. For purposes of this paragraph (f)(1), in the case of a plan 
for which an actuarial report under section 6059 (Schedule SB of Form 
5500) is required to be filed for a plan year, actuarial assumptions 
and the funding method are established by the filing of the actuarial 
report if it is filed no later than the due date (with extensions) for 
the report. In the case of a plan for which an actuarial report for a 
plan year is not required to be filed, actuarial assumptions and the 
funding method are established by the delivery of the completed report 
to the employer if it is delivered no later than what would be the due 
date (with extensions) for filing the actuarial report were such a 
filing required. If the actuarial report is not filed or delivered by 
the applicable date described in the two preceding sentences, then the 
same actuarial assumptions (such as the same interest rate and 
mortality table elections) and funding method as were used for the 
preceding plan year apply for all computations under sections 430 and 
436 for the current plan year, unless the Commissioner permits or 
requires other actuarial assumptions or another funding method 
permitted under section 430 to be used for the current plan year.
    (iv) Scope of funding method. A plan's funding method includes not 
only the overall funding method used by the plan but also each specific 
method of computation used in applying the overall method. However, the 
choice of which actuarial assumptions are appropriate to the overall 
method or to the specific method of computation is not a part of the 
funding method. The assumed earnings rate used for purposes of 
determining

[[Page 53040]]

the actuarial value of assets under section 430(g)(3)(B) is treated as 
an actuarial assumption, rather than as part of the funding method.
    (2) Interest and mortality rates. Section 430(h)(2) and Sec.  
1.430(h)(2)-1 set forth the interest rates, and section 430(h)(3) and 
Sec. Sec.  1.430(h)(3)-1 and 1.430(h)(3)-2 set forth the mortality 
tables, that must be used for purposes of determining any present value 
under this section. However, notwithstanding the requirement to use the 
mortality tables, in the case of a plan which has fewer than 100 
participants and beneficiaries who are not in pay status, the actuarial 
assumptions may assume no pre-retirement mortality, but only if that 
assumption would be a reasonable assumption.
    (3) Other assumptions. In the case of actuarial assumptions other 
than those specified in sections 430(h)(2), 430(h)(3), and 430(i), each 
of those actuarial assumptions must be reasonable (taking into account 
the experience of the plan and reasonable expectations). In addition, 
the actuarial assumptions (other than those specified in sections 
430(h)(2), 430(h)(3), and 430(i)) must, in combination, offer the 
plan's enrolled actuary's best estimate of anticipated experience under 
the plan based on information determined as of the valuation date. See 
paragraph (f)(4)(iii) of this section for special rules for determining 
the present value of a single-sum and similar distributions.
    (4) Probability of benefit payments in single sum or other optional 
forms--(i) In general. This paragraph (f)(4) provides rules relating to 
the probability that benefit payments will be paid as single sums or 
other optional forms under a plan and the impact of that probability on 
the determination of the present value of those benefit payments under 
section 430.
    (ii) General rules of application. Any determination of present 
value or any other computation under this section must take into 
account--
    (A) The probability that future benefit payments under the plan 
will be made in the form of any optional form of benefit provided under 
the plan (including single-sum distributions), determined on the basis 
of the plan's experience and other related assumptions, in accordance 
with paragraph (f)(3) of this section; and
    (B) Any difference in the present value of future benefit payments 
that results from the use of actuarial assumptions in determining the 
amount of benefit payments in any such optional form of benefit that 
are different from those prescribed by section 430(h).
    (iii) Single-sum and similar distributions--(A) Distributions using 
section 417(e) assumptions. In the case of a distribution that is 
subject to section 417(e)(3) and that is determined using the 
applicable interest rates and applicable mortality table under section 
417(e)(3), for purposes of applying paragraph (f)(4)(ii) of this 
section, the computation of the present value of that distribution is 
treated as having taken into account any difference in present value 
that results from the use of actuarial assumptions that are different 
from those prescribed by section 430(h) (as required under paragraph 
(f)(4)(ii)(B) of this section) if and only if the present value of the 
distribution is determined in accordance with this paragraph 
(f)(4)(iii).
    (B) Substitution of annuity form. Except as otherwise provided in 
this paragraph (f)(4)(iii), the present value of a distribution is 
determined in accordance with this paragraph (f)(4)(iii) if that 
present value is determined as the present value, using special 
actuarial assumptions, of the annuity (either the deferred or immediate 
annuity) which is used under the plan to determine the amount of the 
distribution. Under these special assumptions, for the period beginning 
with the expected annuity starting date for the distribution, the 
current applicable mortality table under section 417(e)(3) that would 
apply to a distribution with an annuity starting date occurring on the 
valuation date is substituted for the mortality table under section 
430(h)(3) that would otherwise be used. In addition, under these 
special assumptions, the valuation interest rates under section 
430(h)(2) are used for purposes of discounting the projected annuity 
payments from their expected payment dates to the valuation date (as 
opposed to the interest rates under section 417(e)(3) which the plan 
uses to determine the amount of the benefit).
    (C) Optional application of generational mortality and phase-in of 
interest rates. In determining the present value of a distribution 
under this paragraph (f)(4)(iii), if a plan uses the generational 
mortality tables under Sec.  1.430(h)(3)-1(a)(4) or Sec.  1.430(h)(3)-
2, the plan is permitted to use a 50-50 male-female blend of the 
annuitant mortality rates under the Sec.  1.430(h)(3)-1(a)(4) 
generational mortality tables in lieu of the applicable mortality table 
under section 417(e)(3) that would apply to a distribution with an 
annuity starting date occurring on the valuation date. Similarly, a 
plan is permitted to make adjustments to the interest rates in order to 
reflect differences between the phase-in of the section 430(h)(2) 
segment rates under section 430(h)(2)(G) and the adjustments to the 
segment rates under section 417(e)(3)(D)(iii).
    (D) Distributions subject to section 417(e)(3) using other 
assumptions. In the case of a distribution that is subject to section 
417(e)(3) but that is determined on a basis other than using the 
applicable interest rates and the applicable mortality table under 
section 417(e)(3), for purposes of applying paragraph (f)(4)(ii)(B) of 
this section, the computation of present value must take into account 
the extent to which the present value of the distribution is different 
from the present value determined using the rules of paragraph 
(f)(4)(iii)(B) of this section, based on actuarial assumptions that 
satisfy the requirements of paragraph (f)(3) of this section. If the 
plan provides that the amount of the benefit is based on a comparison 
of the section 417(e)(3) benefit (that is, the benefit determined using 
the applicable interest rates and the applicable mortality table under 
section 417(e)(3)) with another benefit determined using some other 
basis, then paragraph (f)(4)(ii)(B) of this section is applied as of 
the valuation date by comparing the present value of the section 
417(e)(3) benefit determined under the rules of paragraph 
(f)(4)(iii)(B) of this section with the present value of the other 
benefit. The rule of this paragraph (f)(4)(iii)(D) applies, for 
example, where a distribution that is subject to section 417(e)(3) is 
determined as the greater of the benefit determined using the 
applicable interest rates and the applicable mortality table under 
section 417(e)(3) and the benefit determined using some other basis, or 
where the amount of a distribution that is subject to section 417(e)(3) 
is determined using an interest rate other than the applicable interest 
rates as required under section 415(b)(2)(E)(ii) (see Sec.  1.417(e)-
1(d)(1)).
    (5) Distributions from applicable defined benefit plans under 
section 411(a)(13)(C)--(i) In general. In the case of an applicable 
defined benefit plan described in section 411(a)(13)(C), if the amount 
of a future distribution is based on an interest adjustment applied to 
the current accumulated benefit, then the amount of that distribution 
is determined by projecting the future interest credits or equivalent 
amount under the plan's interest crediting rules using actuarial 
assumptions that satisfy the requirements of paragraph (f)(3) of this 
section. Thus, if a plan provides for a single-sum distribution equal 
to the balance of a participant's hypothetical account under a cash 
balance plan, then the amount of that future distribution is equal to 
the projected account balance

[[Page 53041]]

at the expected date of payment determined using actuarial assumptions 
that satisfy the requirements of paragraph (f)(3) of this section.
    (ii) Annuity distributions--(A) General rule. In the case of an 
applicable defined benefit plan described in section 411(a)(13)(C), if 
the amount of an annuity distribution is based on either the balance of 
a hypothetical account maintained for a participant or the accumulated 
percentage of a participant's final average compensation, then the 
amount of that annuity distribution is calculated by converting the 
projected account balance (or accumulated percentage of final average 
compensation), in accordance with paragraph (f)(5)(i) of this section, 
to an annuity by applying the plan's annuity conversion provisions 
using the rules of this paragraph (f)(5)(ii).
    (B) Use of current annuity factors. Except as otherwise provided in 
paragraph (f)(5)(ii)(C) of this section, if the plan bases the 
conversion of the projected account balance (or accumulated percentage 
of final average compensation) to an annuity using the applicable 
interest rates and applicable mortality table under section 417(e)(3), 
then the amount of the annuity distribution is determined by dividing 
the projected account balance (or accumulated percentage of final 
average compensation) by an annuity factor corresponding to the assumed 
form of payment using, for the period beginning with the annuity 
starting date, the current applicable mortality table under section 
417(e)(3) that would apply to a distribution with an annuity starting 
date occurring on the valuation date (in lieu of the mortality table 
under section 430(h)(3) that would otherwise be used) and the valuation 
interest rates under section 430(h)(2) (as opposed to the interest 
rates under section 417(e)(3) which the plan uses to determine the 
amount of the annuity).
    (C) Optional application of generational mortality and phase-in of 
segment rates. In determining the amount of an annuity distribution 
under paragraph (f)(5)(ii)(B) of this section, a plan is permitted to 
apply the options described in paragraph (f)(4)(iii)(C) of this 
section.
    (D) Distributions using assumptions other than assumptions under 
section 417(e)(3). In applying this paragraph (f)(5)(ii), in the case 
of a plan that determines an annuity using a basis other than the 
applicable interest rates and applicable mortality table under section 
417(e)(3), the amount of the annuity distribution must be based on 
actuarial assumptions that satisfy the requirements of paragraph (f)(3) 
of this section.
    (6) Unpredictable contingent event benefits. Any determination of 
present value or any other computation under this section must take 
into account, based on information as of the valuation date, the 
probability that future benefits (or increased benefits) will become 
payable under the plan due to the occurrence of an unpredictable 
contingent event (as described in Sec.  1.436-1(j)(9)). For this 
purpose, this probability with respect to an unpredictable contingent 
event may be assumed to be zero if there is not more than a de minimis 
likelihood that the unpredictable contingent event will occur.
    (7) Reasonable techniques permitted--(i) Determination of benefits 
to be paid during the plan year. Any reasonable technique can be used 
to determine the present value of the benefits expected to be paid 
during a plan year, based on the interest rates and mortality 
assumptions applicable for the plan year. For example, the present 
value of a monthly retirement annuity payable at the beginning of each 
month can be determined--
    (A) Using the standard actuarial approximation that reflects 13/
24ths of the discounted expected payments for the year as of the 
beginning of the year and 11/24ths of the discounted expected payments 
for the year as of the end of the year;
    (B) By assuming a uniform distribution of death during the year; or
    (C) By assuming that the payment is made in the middle of the year.
    (ii) Determination of target normal cost. In the case of a 
participant for whom there is a less than 100 percent probability that 
the participant will terminate employment during the plan year, for 
purposes of determining the benefits expected to accrue, be earned, or 
otherwise allocated to service during the plan year which are used to 
determine the target normal cost, it is permissible to assume the 
participant will not terminate during the plan year, unless using this 
method of calculation would be unreasonable.
    (8) Approval of significant changes in actuarial assumptions for 
large plans--(i) In general. Except as otherwise provided in paragraph 
(f)(8)(iii) of this section, any actuarial assumptions used to 
determine the funding target of a plan for a plan year during which the 
plan is described in paragraph (f)(8)(ii) of this section cannot be 
changed from the actuarial assumptions that were used for the preceding 
plan year without the approval of the Commissioner if the changes in 
assumptions result in a decrease in the plan's funding shortfall 
(within the meaning of section 430(c)(4)) for the current plan year 
(disregarding the effect on the plan's funding shortfall resulting from 
changes in interest and mortality assumptions under sections 430(h)(2) 
and (h)(3)) that either exceeds $50,000,000, or exceeds $5,000,000 and 
is 5 percent or more of the funding target of the plan before such 
change.
    (ii) Affected plans. A plan is described in this paragraph 
(f)(8)(ii) for a plan year if--
    (A) The plan is a defined benefit plan (other than a multiemployer 
plan) to which Title IV of ERISA applies; and
    (B) The aggregate unfunded vested benefits used to determine 
variable-rate premiums for the plan year (as determined under section 
4006(a)(3)(E)(iii) of ERISA) of the plan and all other plans maintained 
by the contributing sponsors (as defined in section 4001(a)(13) of 
ERISA) and members of such sponsors' controlled groups (as defined in 
section 4001(a)(14) of ERISA) which are covered by Title IV of ERISA 
(disregarding multiemployer plans and disregarding plans with no 
unfunded vested benefits) exceed $50,000,000.
    (iii) Automatic approval to resume use of previously used 
assumptions upon exiting at-risk status during phase-in. A plan that is 
not in at-risk status for the current plan year and that was in at-risk 
status for the prior plan year (but not for a period of 5 or more 
consecutive plan years) is granted automatic approval to use the 
actuarial assumptions that were applied before the plan entered at-risk 
status and that were used in combination with the required at-risk 
assumptions during the period the plan was in at-risk status.
    (9) Examples. The following examples illustrate the rules of this 
section. Unless otherwise indicated, these examples are based on the 
following assumptions: The normal retirement age is 65, the minimum 
required contribution for the plan is determined under the rules of 
section 430 starting in 2008, the plan year is the calendar year, the 
valuation date is January 1, no plan-related expenses are paid or 
expected to be paid from plan assets, and the plan does not provide for 
mandatory employee contributions. The examples are as follows:

    Example 1.  (i) Plan P provides an accrued benefit equal to 1.0% 
of a participant's highest 3-year average compensation for each year 
of service. Plan P provides that an early retirement benefit can be 
received at age 60 equal to the participant's accrued benefit 
reduced by 0.5% per month for early commencement. On January 1, 
2010,

[[Page 53042]]

Participant A is age 60 and has 12 years of past service. 
Participant A's compensation for the years 2007 through 2009 was 
$47,000, $50,000, and $52,000, respectively. Participant A's rate of 
compensation at December 31, 2009, is $54,000 and A's rate of 
compensation for 2010 is assumed not to increase at any point during 
2010. Decrements are applied at the beginning of the plan year.
    (ii) Participant A's annual accrued benefit as of January 1, 
2010, is $5,960 [0.01 x 12 x ($47,000 + $50,000 + $52,000) / 3]. 
Participant A's expected benefit accrual for 2010 is $800 [0.01 x 13 
x ($50,000 + $52,000 + $54,000) / 3 - $5,960], to the extent that 
Participant A is expected to continue in employment for the full 
2010 plan year.
    (iii) Because the early retirement benefit is a function of the 
participant's accrued benefit, the allocation of the benefit for 
purposes of determining the target normal cost and funding target is 
made under paragraph (c)(1)(ii)(B) of this section. Accordingly, for 
Participant A, the early retirement benefit that is taken into 
account with respect to the decrement at age 60 when determining the 
2010 funding target is $4,172 [$5,960 accrued benefit x (1 - 0.005 x 
60 months)]. The expected accrual of the early retirement benefit 
during 2010 that is taken into account for Participant A with 
respect to the decrement at age 60 when determining the 2010 target 
normal cost is zero, because in this example the age-60 decrement 
would be applied as of January 1, 2010, before Participant A would 
earn any additional benefits. (But see paragraph (f)(7)(ii) of this 
section for an alternative approach for determining the expected 
accrual with respect to the decrement at age 60.)
    (iv) The early retirement benefit for Participant A with respect 
to the decrement at age 61 that is taken into account in determining 
the funding target for the 2010 plan year is $4,529.60 [$5,960 
accrued benefit x (1 - 0.005 x 48 months)]. The portion of the early 
retirement benefit that is taken into account for Participant A with 
respect to the decrement at age 61 that is taken into account in 
determining the target normal cost for the 2010 plan year is $608 
[$800 expected annual accrual x (1 - 0.005 x 48 months)].
    Example 2.  (i) The facts are the same as in Example 1. In 
addition, the plan offers a $500 temporary monthly supplement to 
participants who complete 15 years of service and retire from active 
employment after attaining age 60. The temporary supplement is 
payable until the participant turns age 62. In addition, the 
supplement is limited so that it does not exceed the participant's 
Social Security benefit payable at age 62. On January 1, 2010, 
Participant B is age 55 and has 20 years of past service, and 
Participant C is age 60 and has 14 years of past service. For 
Participants B and C, the projected Social Security benefit is 
greater than $500 per month.
    (ii) Because the temporary supplement is not a function of the 
participant's accrued benefit or service, the allocation of the 
benefit for purposes of determining the target normal cost and 
funding target is made under paragraph (c)(1)(ii)(D) of this 
section. The portion of the annual temporary supplement for 
Participant B with respect to the early retirement decrement 
occurring at age 60 that is taken into account in determining the 
funding target for the 2010 plan year is $4,800 [($500 x 12 months) 
x 20 years of past service / 25 years of service at assumed early 
retirement age]. The portion of the annual temporary supplement for 
Participant B with respect to the early retirement decrement 
occurring at age 61 that is taken into account in determining the 
funding target for the 2010 plan year is $4,615 [($500 x 12 months) 
x 20 years of past service / 26 years of service at assumed early 
retirement age]. In each case, the allocable portion of the benefit 
is assumed to be payable until age 62 (or the participant's death, 
if earlier).
    (iii) For Participant B, the portion of the annual temporary 
supplement with respect to the early retirement decrement occurring 
at age 60 that is taken into account in determining the target 
normal cost for the 2010 plan year is $240 [($500 x 12 months) x 1 
year of service expected to be earned during the plan year / 25 
years of service at assumed early retirement age]. The portion of 
the annual temporary supplement with respect to the early retirement 
decrement occurring at age 61 that is taken into account in 
determining the target normal cost for the 2010 plan year is $230.77 
[($500 x 12 months) x 1 year of service expected to be earned during 
the plan year / 26 years of service at assumed early retirement 
age]. The present value of these amounts reflects a payment period 
beginning with the decrement at age 60 or 61, as applicable, until 
age 62 (or assumed death, if earlier).
    (iv) For Participant C, the portion of the annual temporary 
supplement with respect to the early retirement decrement occurring 
at age 61 (when the participant is first eligible for the benefit) 
that is taken into account in determining the funding target for the 
2010 plan year is $5,600 [($500 x 12 months) x 14 years of past 
service / 15 years of service at assumed early retirement age]. The 
present value of this amount reflects a payment period beginning 
with the decrement at age 61 until age 62 (or death if earlier).
    Example 3.  (i) The facts are the same as in Example 1. The plan 
also provides a single-sum death benefit (in addition to the 
qualified pre-retirement spouse's benefit) equal to the greater of 
the participant's annual accrued benefit at the time of death, or 
$10,000. The benefit is limited as necessary to ensure that the plan 
meets the incidental death benefit requirements of section 401(a).
    (ii) The determination of the portion of the death benefit that 
is taken into account in determining the target normal cost and 
funding target is made under paragraph (c)(1)(ii)(B) of this section 
to the extent that it is a function of the participant's accrued 
benefit and under paragraph (c)(1)(ii)(D) of this section to the 
extent that it relates to the part of the death benefit that is not 
a function of the participant's accrued benefit.
    (iii) The portion of the single-sum death benefit corresponding 
to the accrued benefit, or $5,960, is taken into account when 
determining the 2010 funding target for Participant A.
    (iv) The excess of the death benefit over Participant A's 
accrued benefit is $4,040 (that is, $10,000 - $5,960). Because this 
part of the death benefit is not a function of the participant's 
accrued benefit nor is it a function of service, the determination 
of the corresponding portion of the death benefit taken into account 
in determining the target normal cost and funding target for 2010 is 
made under paragraph (c)(1)(ii)(D) of this section. For example, for 
Participant A, the portion of this benefit with respect to the death 
decrement occurring at age 64 that is taken into account for 
purposes of determining the funding target for the 2010 plan year is 
$3,030 ($4,040 x 12 years of past service / 16 years of service at 
assumed age of death).
    (v) The total single-sum death benefit for Participant A with 
respect to the death decrement at age 64 that is taken into account 
in determining the funding target for the 2010 plan year is $8,990 
($5,960 + $3,030).
    (vi) Similarly, the portion of the single-sum death benefit for 
Participant A that is taken into account in determining the target 
normal cost for the 2010 plan year is equal to the sum of the 
expected increase in the accrued benefit during 2010, and the 
expected change in the allocable portion of the excess death benefit 
attributable to service during 2010 as determined in accordance with 
paragraph (c)(1)(ii)(D) of this section. As described in Example 1, 
the expected increase in Participant A's accrued benefit during 2010 
is $800, to the extent that Participant A is expected to continue in 
employment for the full 2010 plan year.
    (vii) At the end of 2010, Participant A's accrued benefit is 
expected to be $6,760 ($5,960 + $800). The excess portion of the 
single-sum death benefit to be allocated in accordance with 
paragraph (c)(1)(ii)(D) of this section is $3,240 ($10,000 - 
$6,760), and the allocable portion of the excess benefit for 
Participant A as of December 31, 2010, with respect to the death 
decrement at age 64, is $2,632.50 ($3,240 x 13 years of service as 
of December 31, 2010 / 16 years of service at assumed age of death). 
The change in the allocable portion of Participant A's excess death 
benefit due to an additional year of service, with respect to the 
death decrement at age 64, is a decrease of $397.50. Therefore, the 
target normal cost for the 2010 plan year attributable to 
Participant A, with respect to the death decrement at age 64, will 
reflect a single-sum death benefit of $402.50 ($800 expected 
increase in Participant A's accrued benefit minus a $397.50 expected 
decrease in the allocable portion of the death benefit in excess of 
the accrued benefit).
    Example 4.  (i) The facts are the same as in Example 3, except 
that the plan provides a single-sum death benefit equal to the 
greater of the present value of the qualified pre-retirement 
survivor annuity or 100 times the amount of the participant's 
monthly retirement benefit with service projected to normal 
retirement age. The valuation is based on the assumption that all 
surviving spouses choose to receive their benefit in the form of a 
single sum. For Participant A, the value of the qualified pre-
retirement survivor annuity is less than 100 times Participant A's 
projected monthly retirement benefit.

[[Page 53043]]

    (ii) The allocation of the death benefit that is a function of 
Participant A's accrued benefit is based on service and compensation 
to the first day of the plan year for purposes of determining the 
funding target, and the allocation of the death benefit that is a 
function of the increase in Participant A's accrued benefit during 
the plan year for purposes of determining the target normal cost is 
made in accordance with paragraph (c)(1)(ii)(B) of this section. As 
described in Example 1, Participant A's accrued benefit based on 
service and compensation as of January 1, 2010, is $5,960, or 
$496.67 per month. Accordingly, the portion of the single-sum death 
benefit corresponding to the accrued benefit, or $49,667 (100 times 
$496.67), is taken into account when determining the 2010 funding 
target for Participant A.
    (iii) In addition, the funding target and the target normal cost 
reflect a portion of Participant A's death benefit in excess of the 
amount based on Participant A's accrued benefit. Based on 
Participant A's average compensation as of the first day of the plan 
year, Participant A's accrued benefit with service projected to 
normal retirement is $8,443 [.01 x 17 years of service at age 65 x 
($47,000 + $50,000 + $52,000) / 3], or $703.61 per month. The 
corresponding death benefit is $70,361.
    (iv) The excess of the death benefit over Participant A's 
accrued benefit as of January 1, 2010, is $20,694 (that is, $70,361 
- $49,667). Because this part of the death benefit is not a function 
of Participant A's accrued benefit or service, the portion that is 
taken into account in determining the funding target is determined 
under paragraph (c)(1)(ii)(D) of this section. For Participant A, 
the portion of this benefit with respect to the death decrement 
occurring at age 64 that is taken into account when determining the 
funding target for the 2010 plan year is $15,521 ($20,694 x 12 years 
of past service / 16 years of service at assumed age of death). The 
total single-sum death benefit for Participant A with respect to the 
death decrement at age 64 reflected in the funding target for the 
2010 plan year is $65,188 ($49,667 + $15,521).
    (v) Similarly, the portion of the single-sum death benefit for 
Participant A that is taken into account when determining the target 
normal cost for 2010 is equal to the sum of the death benefit based 
on the expected increase in the accrued benefit during 2010 and the 
expected change in the allocable portion of the excess death benefit 
attributable to service during 2010 as determined in accordance with 
paragraph (c)(1)(ii)(D) of this section.
    (vi) At the end of 2010, Participant A's accrued benefit is 
expected to be $6,760 ($5,960 + $800), or $563.33 per month, and the 
associated death benefit is $56,333. The expected increase in the 
amount of the death benefit attributable to the increase in 
Participant A's accrued benefit is therefore $6,666 ($56,333 - 
$49,667).
    (vii) Participant A's projected accrued benefit at normal 
retirement based on average compensation as of the end of 2010 is 
$8,840 [.01 x 17 years of service at age 65 x ($50,000 + $52,000 + 
$54,000) / 3], or $736.67 per month. The corresponding death benefit 
is $73,667. The excess portion of the single-sum death benefit to be 
allocated in accordance with paragraph (c)(1)(ii)(D) of this section 
is $17,334 ($73,667 - $56,333), and the allocable portion of the 
excess benefit for Participant A as of December 31, 2010, with 
respect to the death decrement at age 64, is $14,084 ($17,334 x 13 
years of service as of December 31, 2010 / 16 years of service at 
assumed age of death).
    (viii) The change in the allocable portion of Participant A's 
excess death benefit during 2010, with respect to the death 
decrement at age 64, is a decrease of $1,437 ($14,084 - $15,521). 
Therefore, the target normal cost for the 2010 plan year 
attributable to Participant A, with respect to the death decrement 
at age 64, will reflect a single-sum death benefit of $5,229 ($6,666 
expected increase in Participant A's death benefit based on the 
expected increase in the accrued benefit, minus an expected decrease 
of $1,437 in the amount of the death benefit in excess of the amount 
attributable to the accrued benefit).
    Example 5.  (i) The facts are the same as in Example 1. In 
addition, the plan provides a disability benefit to participants who 
become disabled after completing 15 years of service. The disability 
benefit is payable at normal retirement age or an earlier date if 
elected by a participant. For purposes of calculating the disability 
benefit, service continues to accrue until normal retirement age 
(unless recovery or commencement of retirement benefits occurs 
earlier). Further, compensation is deemed to continue at the same 
rate as when the disability began.
    (ii) Participant A will be eligible for the disability benefit 
at age 63 after completion of 15 years of service. Participant A's 
annual disability benefit at normal retirement age is $9,180 (that 
is, 1% of highest 3-year average compensation of $54,000 multiplied 
by 17 years of deemed service at normal retirement age).
    (iii) The portion of the disability benefit based on the 
participant's accrued benefit as of the valuation date that is taken 
into account in determining the target normal cost and funding 
target is determined in accordance with paragraph (c)(1)(ii)(B) of 
this section. Accordingly, the portion of the disability benefit 
corresponding to Participant A's accrued benefit as of January 1, 
2010, or $5,960, is taken into account when determining the 2010 
funding target.
    (iv) The excess of Participant A's disability benefit over the 
accrued benefit as of January 1, 2010, is $3,220 ($9,180 - $5,960). 
Because this portion of the disability benefit is not based on 
Participant A's accrued benefit or service, the portion that is 
taken into account in determining the funding target is determined 
under paragraph (c)(1)(ii)(D) of this section. The portion of 
Participant A's excess disability benefit with respect to the 
disability decrement occurring at age 63 that is taken into account 
when determining the 2010 funding target is $2,576 [$3,220 x (12 
years of past service / 15 years of service at assumed date of 
disability)]. The total disability benefit for Participant A, with 
respect to the disability decrement occurring at age 63, that is 
taken into account in determining the funding target for the 2010 
plan year is $8,536 ($5,960 + $2,576).
    (v) The portion of Participant A's disability benefit with 
respect to the disability decrement occurring at age 64 that is 
taken into account when determining the 2010 funding target is 
$8,375 [$5,960 + $3,220 x (12 years of past service / 16 years of 
service at assumed date of disability)].
    (vi) If in fact Participant A becomes disabled at age 63, the 
funding target will reflect the full disability benefit to which 
Participant A will be entitled at normal retirement age, based on 
service projected to normal retirement age (17 years) and final 
average compensation reflecting compensation projected to normal 
retirement age at the rate Participant A was earning at the time of 
disablement.
    Example 6.  (i) The facts are the same as in Example 5, except 
that the disability benefit is based on the accrued benefit 
calculated using service and compensation earned to the date of 
disability.
    (ii) Because the disability benefit is a function of the 
participant's accrued benefit, the portion of Participant A's 
disability benefit that is taken into account when determining the 
funding target for the 2010 plan year is Participant A's annual 
accrued benefit as of January 1, 2010, or $5,960, as determined in 
Example 1. This amount is taken into account for both the disability 
decrement occurring at age 63 and the disability decrement occurring 
at age 64.
    (iii) Similarly, the benefit accrual for Participant A with 
respect to the disability decrements occurring at age 63 and age 64 
that is taken into account when determining the target normal cost 
for the 2010 plan year is equal to Participant A's expected benefit 
accrual for 2010 determined in Example 1, or $800.
    Example 7.  (i) Retiree D, a participant in Plan P, is a male 
age 72 and is receiving a $100 monthly straight life annuity. The 
2009 actuarial valuation is performed using the segment rates 
applicable for September 2008 (determined without regard to the 
transition rule of section 430(h)(2)(G)), and the 2009 annuitant and 
nonannuitant (male and female) mortality tables (published in Notice 
2008-85). See Sec.  601.601(d)(2) relating to objectives and 
standards for publishing regulations, revenue rulings and revenue 
procedures in the Internal Revenue Bulletin.
    (ii) The present value of Retiree D's straight life annuity on 
the valuation date is $10,535.79. This is equal to the sum of: 
$5,029.99, which is the present value of payments expected to be 
made during the first 5 years, using the first segment interest rate 
of 5.07%; $5,322.26, which is the present value of payments expected 
to be made during the next 15 years, using the second segment 
interest rate of 6.09%; and $183.54, which is the present value of 
payments expected to be made after 20 years, using the third segment 
interest rate of 6.56%.
    Example 8. (i) The facts are the same as in Example 7. Plan P 
does not provide for early retirement benefits or single-sum 
distributions. The actuary assumes that no participants terminate 
employment prior to age 50 (other than by death), there is a 5% 
probability of withdrawal at age 50, and that those participants who 
withdraw receive a deferred annuity starting at age 65.

[[Page 53044]]

Participant E is a male age 46 on January 1, 2009, and has an annual 
accrued benefit of $23,000 beginning at age 65.
    (ii) Before taking into account the 5% probability of 
withdrawal, the funding target associated with Participant E's 
assumed age 50 withdrawal benefit in the 2009 actuarial valuation is 
$68,396.75. This is equal to the sum of: $6,925.29, which is the 
present value of payments expected to be made during the year the 
participant turns age 65 (the 20th year after the valuation date), 
using the second segment interest rate of 6.09%; and $61,471.46, 
which is the present value of payments expected to be made after the 
20th year, using the third segment interest rate of 6.56%.
    (iii) Taking the 5% probability of withdrawal into account, the 
funding target for the 2009 plan year associated with Participant 
E's assumed age 50 withdrawal benefit is $3,419.84 ($68,396.75 x 
5%).
    Example 9. (i) The facts are the same as in Example 8, except 
the plan offers a single-sum distribution payable at normal 
retirement age (age 65) determined based on the applicable interest 
rates and the applicable mortality table under section 417(e)(3). 
The actuary assumes that 70% of the participants will elect a single 
sum upon retirement and the remaining 30% will elect a straight life 
annuity.
    (ii) Before taking into account the 5% probability of withdrawal 
or the 70% probability of electing a single-sum payment, the portion 
of the 2009 funding target that is attributable to Participant E's 
assumed single-sum payment, deferred to age 65, is $70,052.30. This 
is calculated in the same manner as the present value of annuity 
payments, except that, for the period after the annuity starting 
date, the 2009 applicable mortality rates are substituted for the 
2009 male annuitant mortality rates. This portion of the funding 
target for the 2009 plan year is equal to the sum of: $6,929.00, 
which is the present value of annuity payments expected to be made 
between age 65 and 66 (during the 20th year after the valuation 
date), using the second segment interest rate of 6.09%; and 
$63,123.30, which is the present value of annuity payments expected 
to be made after the 20th year following the valuation date, using 
the third segment interest rate of 6.56%. These present value 
amounts reflect the 2009 male nonannuitant mortality rates prior to 
the assumed commencement of benefits at age 65 and the 100% 
probability of retiring at age 65.
    (iii) Taking the 5% probability of withdrawal and the 70% 
probability of electing a single-sum payment into account, the 
portion of the 2009 funding target attributable to Participant E's 
assumed single-sum payment based on withdrawal at age 50 is 
$2,451.83 ($70,052.30 x 5% x 70%). After taking into account the 5% 
probability of withdrawal and the 30% probability of electing a 
straight life annuity, the portion of the 2009 funding target that 
is attributable to Participant E's assumed straight life annuity 
(based on assumed withdrawal at age 50), deferred to age 65, is 
equal to 30% of the result obtained in Example 8.
    Example 10. (i) The facts are the same as in Example 9, except 
the plan offers an immediate single sum upon withdrawal at age 50 
determined based on the applicable interest rates and the applicable 
mortality table under section 417(e)(3). The actuary assumes that 
70% of the participants will elect to receive a single-sum 
distribution upon withdrawal.
    (ii) Before taking into account the 5% probability of withdrawal 
and the 70% probability of electing a single-sum payment, the 
portion of the funding target for the 2009 plan year that is 
attributable to Participant E's assumed single-sum payment based on 
withdrawal at age 50 is $68,908.39. This is calculated in the same 
manner as the present value of annuity payments, except that the 
2009 applicable mortality rates are substituted for the 2009 male 
annuitant and nonannuitant mortality rates after the annuity 
starting date. This portion of the 2009 funding target is equal to 
the sum of $6,815.85, which is the present value of annuity payments 
expected to be made between age 65 and 66 (during the 20th year 
after the valuation date), using the second segment interest rate of 
6.09%, and $62,092.54, which is the present value of annuity 
payments expected to be made after the 20th year following the 
valuation date, using the third segment interest rate of 6.56%. 
These present value amounts reflect the 2009 male nonannuitant 
mortality rates prior to the assumed single-sum distribution age of 
50.
    (iii) Applying the 5% probability of withdrawal at age 50 and 
the 70% probability of electing a single-sum payment, the portion of 
the funding target for the 2009 plan year that is attributable to 
Participant E's assumed single-sum payment (based on withdrawal at 
age 50) is $2,411.79 ($68,908.39 x 5% x 70%).
    Example 11. (i) The facts are the same as in Example 8, except 
that the plan sponsor elects under section 430(h)(2)(D)(ii) to use 
the monthly corporate bond yield curve instead of segment rates. The 
enrolled actuary assumes payments are made monthly throughout the 
year and uses the interest rate from the middle of the monthly 
corporate bond yield curve because this mid-year yield rate most 
closely matches the average timing of benefits paid. In accordance 
with Sec.  1.430(h)(2)-1(e)(4), the applicable monthly corporate 
bond yield curve is the yield curve derived from December 2008 
rates.
    (ii) Before taking into account the 5% probability of 
withdrawal, the funding target associated with Participant E's 
assumed age 50 withdrawal benefit in the 2009 actuarial valuation is 
$67,394.12. This reflects the sum of each year's expected payments, 
discounted at the yield rates described in paragraph (i) of this 
Example 11, as shown below:

----------------------------------------------------------------------------------------------------------------
                  Age                             Maturity                   Yield rate           Present value
----------------------------------------------------------------------------------------------------------------
65.....................................  19.5......................  6.97%.....................        $5,897.88
66.....................................  20.5......................  6.90%.....................         5,524.69
67.....................................  21.5......................  6.84%.....................         5,164.63
68 and over............................  Varies....................  Varies....................        50,806.92
                                                                                                ----------------
    Total..............................  ..........................  ..........................        67,394.12
----------------------------------------------------------------------------------------------------------------

     (iii) Applying the 5% probability of withdrawal, the portion of 
the funding target for the 2009 plan year attributable to 
Participant E's assumed withdrawal at age 50 is $3,369.71 
($67,394.12 x 5%).
    Example 12. (i) The facts are the same as in Example 10, except 
that the plan determines the amount of the immediate single-sum 
distribution upon withdrawal at age 50 based on the applicable 
interest rates under section 417(e)(3) or an interest rate of 6.25%, 
whichever produces the higher amount. The applicable mortality table 
under section 417(e)(3) is used for both calculations.
    (ii) Before taking into account the 5% probability of withdrawal 
and the 70% probability of electing a single-sum payment, the 
present value of Participant E's single-sum distribution as of 
January 1, 2009, using an interest rate of 6.25%, based on 
withdrawal at age 50, is $77,391.88. This amount is determined by 
calculating the projected single-sum distribution at age 50 using 
the applicable mortality rate under section 417(e)(3) and an 
interest rate of 6.25%, or $94,789.10, and discounting the result to 
the January 1, 2009, valuation date using the first segment rate of 
5.07% (because the single-sum distribution is assumed to be paid 4 
years after the valuation date) and the male non-annuitant mortality 
rates for 2009.
    (iii) Before taking into account the 5% probability of 
withdrawal and the 70% probability of electing a single-sum payment, 
the present value as of January 1, 2009, of Participant E's age-50 
single-sum distribution using the applicable interest rates and 
applicable mortality table under section 417(e)(3) is $68,908.39, as 
developed in Example 10. Corresponding to plan provisions, the 
present value reflected in the funding target is the larger of this 
amount or the present value of the amount based on a 6.25% interest 
rate, or $77,391.88.
    (iv) Applying the 5% probability of withdrawal at age 50 and the 
70% probability of electing a single-sum payment, the portion of the 
funding target for the 2009 plan year that is attributable to 
Participant E's assumed single-sum payment (based on withdrawal at

[[Page 53045]]

age 50) is $2,708.72 ($77,391.88 x 5% x 70%).
    Example 13. (i) Plan Q is a cash balance plan that permits an 
immediate payment of a single sum equal to the participant's 
hypothetical account balance upon termination of employment. Plan 
Q's terms provide that the hypothetical account is credited with 
interest at a market-related rate, based on a specified index. The 
January 1, 2009, actuarial valuation is performed using the 24-month 
average segment rates applicable for September 2008 (determined 
without regard to the transition rule of section 430(h)(2)(G)). 
Participant F is a male age 61 on January 1, 2009, and has a 
hypothetical account balance equal to $150,000 on that date. In the 
2009 actuarial valuation, the enrolled actuary assumes that the 
hypothetical account balances will increase with annual interest 
credits of 7% until the participant commences receiving his or her 
benefit, corresponding to the actuary's best estimate of future 
interest rates credited under the terms of the plan. The actuary 
also assumes that all participants will retire on the first day of 
the plan year in which they attain age 65 (that is, no participant 
will terminate employment prior to age 65 other than by death), and 
that 100% of participants will elect a single sum upon retirement.
    (ii) Participant F's hypothetical account balance projected to 
January 1, 2013 (the plan year in which F attains age 65) is 
$196,619.40 based on the assumed annual interest crediting rate of 
7%. The funding target for the 2009 plan year attributable to 
Participant F's benefit at age 65 is $158,525.81, which is 
calculated by discounting the projected hypothetical account balance 
of $196,619.40 using the first segment rate of 5.07% and the male 
non-annuitant mortality rates.
    Example 14. (i) The facts are the same as in Example 13, except 
that the actuary assumes that 10% of the participants will choose to 
collect their benefits in the form of a straight life annuity. The 
plan provides that the participant's account balance at retirement 
is converted to an annuity using the applicable interest rates and 
applicable mortality table under section 417(e)(3).
    (ii) Participant F's hypothetical account balance projected to 
January 1, 2013 (the plan year in which F attains age 65) is 
$196,619.40, as outlined in Example 13. This amount is converted to 
an annuity payable commencing at age 65 by dividing the projected 
account balance by an annuity factor based on the applicable 
mortality table for 2009 under section 417(e)(3) (corresponding to 
the valuation date) and the interest rates used for the valuation. 
The resulting annuity factor is 10.8321, reflecting one year of 
interest at the first segment rate (5.07%) corresponding to the 
first year of the expected annuity payments (the fifth year after 
the valuation date), 15 years of interest at the second segment rate 
(6.09%) and all remaining years at the third segment rate (6.56%). 
The projected future annuity is therefore $196,619.40 divided by 
10.8321, or $18,151.55 per year.
    (iii) Before taking into account the 10% probability that the 
participant will elect to take the distribution in the form of a 
lifetime annuity, the funding target associated with the future 
annuity payout for Participant F is $149,120.41. This is equal to 
the sum of $14,242.79, which is the present value of the annuity 
payment expected to made during the year the participant turns age 
65 (the 5th year after the valuation date), using the first segment 
interest rate of 5.07%; $116,321.72, which is the present value of 
payments expected to be made during the 6th through the 20th years 
following the valuation date, using the second segment interest rate 
of 6.09%; and $18,555.90, which is the present value of payments 
expected to be made after the 20th year following the valuation 
date, using the third segment interest rate of 6.56%.
    (iv) Applying the 10% probability of electing a lifetime 
annuity, the portion of the 2009 funding target attributable to 
Participant F's assumed lifetime annuity payable at age 65 is 
$14,912.04. The portion of the 2009 funding target attributable to 
Participant F's assumed single-sum payment is 90% of the result 
obtained in Example 13.
    Example 15. (i) Plan H provides a monthly benefit of $50 times 
service for all participants. Plan H has a funding target of 
$1,000,000 and an actuarial value of assets of $810,000 as of 
January 1, 2010. No annuity contracts have been purchased, and Plan 
H has no funding standard carryover balance or prefunding balance as 
of January 1, 2010. The enrolled actuary certifies that the January 
1, 2010, AFTAP is 81%. Effective July 1, 2010, Plan H is amended on 
June 14, 2010, to increase the plan's monthly benefit to $55 for 
years of service earned on or after July 1, 2010. The present value 
of the increase in plan benefits during 2010 (reflecting benefit 
accruals attributable to the six months between July 1, 2010, and 
December 31, 2010) is $25,000.
    (ii) The amendment increases benefits for future service only, 
and so the funding target is unaffected. Since section 436(c) only 
restricts plan amendments that increase plan liabilities, the plan 
amendment can take effect.
    (iii) If the $25,000 present value of the increase in plan 
benefits during 2010 were included in Plan H's funding target of 
$1,000,000, the total would be $1,025,000, and the AFTAP would be 
79.02% (that is, $810,000/$1,025,000). Since this is less than 80%, 
the amendment would not have been permitted to take effect if the 
2010 increase were included in the funding target instead of target 
normal cost.
    (iv) Because the amendment was adopted after the January 1, 
2010, valuation date, the plan sponsor would generally have the 
option of deciding whether to reflect this amendment in the January 
1, 2010, valuation or defer recognition of the amendment to the 
January 1, 2011, valuation. However, under paragraph (d)(2) of this 
section, because the plan amendment would not have been permitted to 
take effect under the provisions of section 436 if the increase in 
the target normal cost for the plan year had been taken into account 
in the funding target, the actuary must take into account the 
amendment in the January 1, 2010, valuation for purposes of section 
430. Thus, the target normal cost for the plan year includes the 
$25,000 that results from the plan amendment.

    (g) Effective/applicability dates and transition rules--(1) 
Statutory effective date/applicability date--(i) In general. Section 
430 generally applies to plan years beginning on or after January 1, 
2008. The applicability of section 430 for purposes of determining the 
minimum required contribution is delayed for certain plans in 
accordance with sections 104 through 106 of PPA '06.
    (ii) Applicability of special adjustments. The special adjustments 
of paragraph (b)(1)(iii) of this section (relating to adjustments to 
the target normal cost for plan-related expenses and mandatory employee 
contributions) apply to plan years beginning after December 31, 2008. 
In addition, a plan sponsor may elect to make the special adjustments 
of paragraph (b)(1)(iii) of this section for a plan year beginning in 
2008. This election must take into account both adjustments described 
in paragraph (b)(1)(iii) of this section. This election is subject to 
the same rules that apply to an election to add an amount to the plan's 
prefunding balance pursuant to Sec.  1.430(f)-1(f), and it must be made 
in the same manner as the election made under Sec.  1.430(f)-1(f). 
Thus, the election can be made no later than the last day for making 
the minimum required contribution for the plan year to which the 
election relates.
    (2) Effective date/applicability date of regulations. This section 
applies to plan years beginning on or after January 1, 2010, regardless 
of whether section 430 applies to determine the minimum required 
contribution for the plan year. For plan years beginning before January 
1, 2010, plans are permitted to rely on the provisions set forth in 
this section for purposes of satisfying the requirements of section 
430.
    (3) Approval for changes in funding method--(i) 2008 plan year. Any 
changes in a plan's funding method that are made for the first plan 
year beginning in 2008 that are not inconsistent with the requirements 
of section 430 are treated as having been approved by the Commissioner 
and do not require the Commissioner's specific prior approval.
    (ii) Application of this section--(A) First plan year for which 
regulations are effective. Except as otherwise provided in paragraph 
(g)(3)(ii)(B) of this section, any change in a plan's funding method 
for the first plan year that begins on or after January 1, 2010, is 
treated as having been approved by the Commissioner and does not 
require the Commissioner's specific prior approval.

[[Page 53046]]

    (B) Optional earlier application of regulations. For the first plan 
year that a plan applies all the provisions of this section, Sec. Sec.  
1.430(f)-1, 1.430(g)-1, 1.430(i)-1, and 1.436-1, any change in a plan's 
funding method for that plan year is treated as having been approved by 
the Commissioner and does not require the Commissioner's specific prior 
approval. For example, if the change in funding method includes a 
change in the valuation software, the change in the valuation software 
is treated as having been approved by the Commissioner and does not 
require the Commissioner's specific prior approval. If that plan year 
begins before January 1, 2010, the automatic approval for a change in 
funding method under paragraph (g)(3)(ii)(A) of this section does not 
apply to the plan.
    (C) Special rule for changes in allocation. Any change in a plan's 
funding method for a plan year earlier than the first plan year 
beginning on or after January 1, 2010, that is necessary to apply the 
rules of paragraph (c)(1)(ii) of this section is treated as having been 
approved by the Commissioner and does not require the Commissioner's 
specific prior approval.
    (iii) First plan year for which section 430 applies to determine 
minimum funding. For a plan for which the minimum required contribution 
is not determined under section 430 for the first plan year that begins 
on or after January 1, 2008, pursuant to sections 104 through 106 of 
PPA '06, any change in a plan's funding method for the first plan year 
to which section 430 applies to determine the plan's minimum required 
contribution is treated as having been approved by the Commissioner and 
does not require the Commissioner's specific prior approval.
    (4) Approval for changes in actuarial assumptions. The 
Commissioner's specific prior approval is not required with respect to 
any actuarial assumptions that are adopted for the first plan year for 
which section 430 applies to determine the minimum required 
contribution for the plan and that are not inconsistent with the 
requirements of section 430.
    (5) Transition rule for determining funding target attainment 
percentage for the 2007 plan year--(i) In general. For purposes of the 
first plan year beginning on or after January 1, 2008, the funding 
target attainment percentage for the plan's prior plan year (the 2007 
plan year) is determined as the fraction (expressed as a percentage), 
the numerator of which is the value of plan assets determined under 
paragraph (g)(5)(ii) of this section, and the denominator of which is 
the plan's current liability determined pursuant to section 412(l)(7) 
(as in effect prior to amendment by PPA '06) as of the valuation date 
for the 2007 plan year.
    (ii) Determination of value of plan assets--(A) In general. The 
value of plan assets for the 2007 plan year under this paragraph 
(g)(5)(ii)(A) is determined as the value of plan assets as described in 
paragraph (g)(5)(ii)(B) of this section, reduced by the plan's funding 
standard account credit balance for the 2007 plan year as described in 
paragraph (g)(5)(iii)(A) of this section except to the extent provided 
in paragraph (g)(5)(iii)(B) of this section.
    (B) Value of plan assets. The value of plan assets for the 2007 
plan year under this paragraph (g)(5)(ii)(B) is determined under 
section 412(c)(2) as in effect for the 2007 plan year, except that the 
value of plan assets prior to subtracting the plan's funding standard 
account credit balance described in paragraph (g)(5)(iii)(A) of this 
section must be adjusted so that it is neither less than 90 percent of 
the fair market value of plan assets nor greater than 110 percent of 
the fair market value of plan assets on the valuation date for that 
plan year. If the value of plan assets prior to adjustment under this 
paragraph (g)(5)(ii)(B) is less than 90 percent of the fair market 
value of plan assets on the valuation date, then the value of plan 
assets under this paragraph (g)(5)(ii)(B) is equal to 90 percent of the 
fair market value of plan assets. If the value of plan assets 
determined under this paragraph (g)(5)(ii)(B) is greater than 110 
percent of the fair market value of plan assets on the valuation date, 
then the value of plan assets under this paragraph (g)(5)(ii)(B) is 
equal to 110 percent of the fair market value of plan assets.
    (iii) Subtraction of credit balance--(A) In general. If a plan has 
a funding standard account credit balance as of the valuation date for 
the 2007 plan year, then, except as described in paragraph 
(g)(5)(iii)(B) of this section, that balance is subtracted from the 
value of plan assets described in paragraph (g)(5)(ii)(B) of this 
section as of that valuation date to determine the value of plan assets 
for the 2007 plan year. However, the value of plan assets is not 
reduced below zero.
    (B) Effect of funding standard carryover balance reduction for the 
2008 plan year. Notwithstanding the rules of paragraph (g)(5)(iii)(A) 
of this section, for the first plan year beginning in 2008, if the 
employer has made an election to reduce some or all of the funding 
standard carryover balance as of the first day of that year in 
accordance with Sec.  1.430(f)-1(e), then the present value (determined 
as of the valuation date for the 2007 plan year using the valuation 
interest rate for that 2007 plan year) of the amount so reduced is not 
treated as part of the funding standard account credit balance when 
that balance is subtracted from the value of plan assets pursuant to 
paragraph (g)(5)(iii)(A) of this section.

0
Par. 3. 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 and funding standard carryover 
balances under section 430(f). Section 430 and this section apply to 
single employer defined benefit plans (including multiple employer 
plans) that are subject to section 412, but do not apply to 
multiemployer plans (as defined in section 414(f)). Paragraph (b) of 
this section sets forth rules regarding a plan's prefunding balance and 
a plan sponsor's election to maintain a funding standard carryover 
balance. Paragraph (c) of this section provides rules under which those 
balances must be subtracted from plan assets. Paragraph (d) of this 
section describes a plan sponsor's election to use those balances to 
offset the minimum required contribution. Paragraph (e) of this section 
describes a plan sponsor's election to reduce those balances (which 
will affect the determination of the value of plan assets for purposes 
of sections 430 and 436). Paragraph (f) of this section sets forth 
rules regarding elections under this section. Paragraph (g) of this 
section contains examples. Paragraph (h) of this section contains 
effective/applicability dates and transition rules.
    (2) Special rules for multiple employer plans. In the case of a 
multiple employer plan to which section 413(c)(4)(A) applies, the rules 
of this section are applied separately for each employer under the 
plan, as if each employer maintained a separate plan. Thus, each 
employer under such a multiple employer plan may have a separate 
funding standard carryover balance and a prefunding balance for the 
plan. In the case of a multiple employer plan to which section 
413(c)(4)(A) does not apply (that is, a plan described in section 
413(c)(4)(B) that has not made the election for section 413(c)(4)(A) to 
apply), the rules of this section are applied as if all participants in 
the plan were employed by a single employer.
    (b) Maintenance of balances--(1) Prefunding balance--(i) In 
general. A plan sponsor is permitted to elect to

[[Page 53047]]

maintain a prefunding balance for a plan. A prefunding balance 
maintained for a plan consists of a beginning balance of zero, 
increased by the amount of excess contributions to the extent the 
employer elects to do so as described in paragraph (b)(1)(ii) of this 
section, and decreased to the extent provided in paragraph (b)(1)(iii) 
of this section. The plan sponsor's initial election to add to the 
prefunding balance under paragraph (b)(1)(ii) of this section 
constitutes an election to maintain a prefunding balance. The 
prefunding balance is adjusted further for investment return and 
interest as provided in paragraphs (b)(3) and (b)(4) of this section.
    (ii) Increases--(A) In general. If the plan sponsor of a plan 
elects to add to the plan's prefunding balance, as of the first day of 
a plan year following the first effective plan year for the plan, the 
prefunding balance is increased by the amount so elected by the plan 
sponsor for the plan year. The amount added to the prefunding balance 
cannot exceed the present value of the excess contributions for the 
preceding plan year determined under paragraph (b)(1)(ii)(B) of this 
section, increased for interest in accordance with paragraph 
(b)(1)(iv)(A) of this section.
    (B) Present value of excess contribution. The present value of the 
excess contribution for the preceding plan year is the excess, if any, 
of--
    (1) The present value (determined under the rules of paragraph 
(b)(1)(iv)(B) of this section) of the employer contributions (other 
than contributions to avoid or terminate benefit limitations described 
in Sec.  1.436-1(f)(2)) to the plan for such preceding plan year; over
    (2) The minimum required contribution for such preceding plan year.
    (C) Treatment of unpaid minimum required contributions. For 
purposes of this paragraph (b)(1)(ii), a contribution made during a 
plan year to correct an unpaid minimum required contribution (within 
the meaning of section 4971(c)(4)) for a prior plan year is not treated 
as a contribution for the current plan year.
    (iii) Decreases. As of the first day of each plan year, the 
prefunding balance of a plan is decreased (but not below zero) by the 
sum of--
    (A) Any amount of the prefunding balance that was used under 
paragraph (d) of this section to offset the minimum required 
contribution of the plan for the preceding plan year; and
    (B) Any reduction in the prefunding balance under paragraph (e) of 
this section for the plan year.
    (iv) Adjustments for interest--(A) Adjustment of excess 
contribution. The present value of the excess contribution for the 
preceding year (as determined under paragraph (b)(1)(ii)(B) of this 
section) is increased for interest accruing for the period between the 
valuation date for the preceding plan year and the first day of the 
current plan year. For this purpose, interest is determined by using 
the plan's effective interest rate under section 430(h)(2)(A) for the 
preceding plan year, except to the extent provided in paragraph 
(b)(3)(iii) of this section.
    (B) Determination of present value. The present value of the 
contributions described in paragraph (b)(1)(ii)(B)(1) of this section 
is determined as of the valuation date for the preceding plan year, 
using the plan's effective interest rate under section 430(h)(2)(A) for 
the preceding plan year.
    (2) Funding standard carryover balance--(i) In general. A funding 
standard carryover balance is automatically established for a plan that 
had a positive balance in the funding standard account under section 
412(b) (as in effect prior to amendment by the Pension Protection Act 
of 2006 (PPA '06), Public Law 109-280 (120 Stat. 780)) as of the end of 
the pre-effective plan year for the plan. The funding standard 
carryover balance as of the beginning of the first effective plan year 
for the plan is the positive balance in the funding standard account 
under section 412(b) (as in effect prior to amendment by PPA '06) as of 
the end of the pre-effective plan year for the plan. After that date, 
the funding standard carryover balance is decreased to the extent 
provided in paragraph (b)(2)(ii) of this section and adjusted further 
for investment return and interest as provided in paragraphs (b)(3) and 
(b)(4) of this section.
    (ii) Decreases. As of the first day of each plan year, the funding 
standard carryover balance of a plan is decreased (but not below zero) 
by the sum of--
    (A) Any amount of the funding standard carryover balance that was 
used under paragraph (d) of this section to offset the minimum required 
contribution of the plan for the preceding plan year; and
    (B) Any reduction in the funding standard carryover balance under 
paragraph (e) of this section for the plan year.
    (3) Adjustments for investment experience--(i) In general. A plan's 
prefunding balance under paragraph (b)(1) of this section and a plan's 
funding standard carryover balance under paragraph (b)(2) of this 
section as of the first day of a plan year must be adjusted to reflect 
the actual rate of return on plan assets for the preceding plan year. 
For this purpose, the actual rate of return on plan assets for the 
preceding plan year is determined on the basis of fair market value and 
must take into account the amount and timing of all contributions, 
distributions, and other plan payments made during that period.
    (ii) Ordering rules for adjustments. In general, the adjustment for 
actual rate of return on plan assets is applied to the balance after 
any reduction of prefunding and funding standard carryover balances for 
that preceding plan year under paragraph (e) of this section and after 
subtracting amounts used to offset the minimum required contribution 
for the preceding plan year pursuant to paragraph (d) of this section. 
However, see paragraph (d)(1)(ii)(D) of this section for a special 
ordering rule when adjusting for investment experience.
    (iii) Special rule for excess contributions attributable to use of 
funding balances. Notwithstanding paragraph (b)(1)(iv)(A) of this 
section, to the extent that a contribution is included in the present 
value of excess contributions solely because the minimum required 
contribution has been offset under paragraph (d) of this section, the 
contribution is adjusted for investment experience under the rules of 
this paragraph (b)(3).
    (4) Valuation date other than the first day of the plan year--(i) 
In general. If a plan's valuation date is not the first day of the plan 
year, then, solely for purposes of applying paragraphs (c), (d), and 
(e) of this section, the plan's prefunding and funding standard 
carryover balances (if any) determined under this paragraph (b) are 
increased from the first day of the plan year to the valuation date 
using the plan's effective interest rate under section 430(h)(2)(A) for 
the plan year.
    (ii) Special rule for adjustments for investment experience. In the 
case of a plan with a valuation date that is not the first day of the 
plan year, for purposes of applying the subtraction under paragraph 
(b)(3)(ii) of this section for amounts used to offset the minimum 
required contribution for the preceding plan year and the decreases 
under paragraphs (b)(1)(iii) and (b)(2)(ii) of this section, the amount 
of the prefunding balance or funding standard carryover balance that is 
used to offset the minimum required contribution under paragraph (d) of 
this section or reduced under paragraph (e) of this section is 
discounted from the valuation date to the first day of the plan year 
using the

[[Page 53048]]

effective interest rate under section 430(h)(2)(A) for the plan year.
    (5) Special rule for quarterly contributions--(i) Quarterly 
contributions due on or after the valuation date. For purposes of 
applying a prefunding balance or funding standard carryover balance to 
required installments described in section 430(j)(3) that are due on or 
after the valuation date for the plan year for which they are due, the 
respective balances are increased from the beginning of the year to the 
date of the election (using the plan's effective interest rate for the 
plan year) to determine the amount available to offset the required 
quarterly installment. The amounts used to offset required quarterly 
installments are then discounted from that date to the first day of the 
plan year for purposes of the subtraction under paragraph (b)(3)(ii) of 
this section and the decreases under paragraphs (b)(1)(iii) and 
(b)(2)(ii) of this section, using the effective interest rate for the 
plan year. However, see paragraph (d)(1)(i)(B) of this section for a 
special rule regarding late quarterly installments when determining the 
amount that is used to offset the minimum required contribution for the 
plan year.
    (ii) Quarterly contributions due before the valuation date. 
[Reserved.]
    (c) Effect of balances on the value of plan assets--(1) In general. 
In the case of any plan with a prefunding balance or a funding standard 
carryover balance, the amount of those balances is subtracted from the 
value of plan assets for purposes of sections 430 and 436, except as 
otherwise provided in paragraphs (c)(2), (c)(3), and (d)(3) of this 
section and Sec.  1.436-1(j)(1)(ii)(B).
    (2) Subtraction of balances in determining new shortfall 
amortization base--(i) Prefunding balance. For purposes of determining 
whether a plan is exempt from the requirement to establish a new 
shortfall amortization base under section 430(c)(5), the amount of the 
prefunding balance is subtracted from the value of plan assets only if 
an election under paragraph (d) of this section to use the prefunding 
balance to offset the minimum required contribution is made for the 
plan year.
    (ii) Funding standard carryover balance. For purposes of 
determining whether a plan is exempt from the requirement to establish 
a new shortfall amortization base under section 430(c)(5), the funding 
standard carryover balance is not subtracted from the value of plan 
assets regardless of whether any portion of either the funding standard 
carryover balance or the prefunding balance is used to offset the 
minimum required contribution for the plan year under paragraph (d) of 
this section.
    (3) Special rule for certain binding agreements with PBGC. If there 
is in effect for a plan year a binding written agreement with the 
Pension Benefit Guaranty Corporation (PBGC) which provides that all or 
a portion of the prefunding balance or funding standard carryover 
balance (or both balances) is not available to offset the minimum 
required contribution for a plan year, that specified amount is not 
subtracted from the value of plan assets for purposes of determining 
the funding shortfall under section 430(c)(4). For example, if a plan 
has no prefunding balance and a $20 million funding standard carryover 
balance, a PBGC agreement provides that $5 million of a plan's funding 
standard carryover balance is unavailable to offset the minimum 
required contribution for a plan year, and the plan's assets are $100 
million, then the value of plan assets for purposes of determining the 
funding shortfall under section 430(c)(4) is reduced by $15 million 
($20 million less $5 million) to $85 million. For purposes of this 
paragraph (c)(3), an agreement with the PBGC is taken into account with 
respect to a plan year only if the agreement was executed prior to the 
valuation date for the plan year.
    (d) Election to apply balances against minimum required 
contribution--(1) In general--(i) Amount of offset to minimum required 
contribution--(A) Effect of use of balances. Subject to the limitations 
provided in this paragraph (d), in the case of any plan year with 
respect to which the plan sponsor elects to use all or a portion of the 
prefunding balance or the funding standard carryover balance to offset 
the minimum required contribution for the plan year, the minimum 
required contribution for the plan year (determined after taking into 
account any waiver under section 412(c)) is offset as of the valuation 
date for the plan year by the amount so used.
    (B) Special rule for late quarterly contributions--(1) Quarterly 
contributions due on or after the valuation date. Notwithstanding 
paragraph (d)(1)(i)(A) of this section, if the plan sponsor elects to 
use all or a portion of the prefunding balance or the funding standard 
carryover balance to satisfy a required installment under section 
430(j)(3) that is due on or after the valuation date, the amount used 
to offset the minimum required contribution for the plan year is the 
portion of the balance so used, discounted in accordance with the rules 
of paragraph (b)(5) of this section, unless the date of the election is 
after the due date of the required installment. If the election to use 
all or a portion of the prefunding balance or the funding standard 
carryover balance to satisfy the required installments under section 
430(j)(3) is made after the due date for the required installment, then 
the amount used to offset the minimum required contribution for the 
plan year is the portion of the balance so used, discounted from the 
date of the election to the due date of the required installment at the 
effective interest rate plus 5 percentage points, and then further 
discounted from the installment due date to the valuation date at the 
effective interest rate. For example, if a quarterly installment of 
$20,250 is due on April 15 for a calendar year plan with a valuation 
date on January 1 and an effective interest rate of 6 percent, and the 
installment is satisfied by an election to apply the funding standard 
carryover balance that is made on July 1 (2\1/2\; months after the 
April 15 due date), then the amount used to offset the minimum required 
contribution under this paragraph (d)(1)(i) is $19,481 (that is, 
$20,250 / 1.11(\2.5/12\) / 1.06(\3.5/12\). However, the amount by which 
the funding standard carryover balance is reduced under paragraph 
(b)(2)(ii) of this section is $19,669 (that is, $20,250 / 1.06(\6/12\).
    (2) Quarterly contributions due before the valuation date. 
[Reserved.]
    (ii) Maximum amount of available balances and coordination of 
elections--(A) General requirement to follow chronology. In general, 
the amount of prefunding and funding standard carryover balances that 
may be used to offset the minimum required contribution for a plan year 
must take into account any decrease in those balances which results 
from a prior election either to use the prefunding balance or funding 
standard carryover balance under section 430(f)(3) and this paragraph 
(d) or to reduce those balances under section 430(f)(5) and paragraph 
(e) of this section (including deemed elections under section 436(f)(3) 
and Sec.  1.436-1(a)(5)). For example, for a calendar plan year with a 
January 1 valuation date, a deemed election under section 436(f)(3) and 
Sec.  1.436-1(a)(5) on April 1, 2010 (the first day of the 4th month of 
the plan year) will reduce the available prefunding balance or funding 
standard carryover balance that can be used with respect to an election 
made after April 1, 2010.
    (B) Exception to chronological rule. Notwithstanding the general 
rule of paragraph (d)(1)(ii)(A) of this section, all elections under 
section 430(f)(5) and paragraph (e) of this section to reduce the 
prefunding balance or funding

[[Page 53049]]

standard carryover balance for the current plan year (including deemed 
elections under section 436(f)(3) and Sec.  1.436-1(a)(5)) are deemed 
to occur on the valuation date for the plan year and before any 
election under section 430(f)(3) and this paragraph (d) to offset the 
minimum required contribution for the current plan year. Accordingly, 
if an election to use the prefunding balance or funding standard 
carryover balance to offset the minimum required contribution for the 
plan year (including an election to satisfy the quarterly contribution 
requirement) has been made prior to the election to reduce the 
prefunding balance or funding standard carryover balance, then the 
amount available for use to offset the otherwise applicable minimum 
required contribution for the plan year under this paragraph (d) will 
be retroactively reduced. However, an election to reduce a prefunding 
balance or funding standard carryover balance for a plan year does not 
affect a prior election to use a prefunding balance or funding standard 
carryover balance to offset a minimum required contribution for a prior 
plan year.
    (C) Investment experience. In addition to reflecting any decrease 
in the prefunding balance or the funding standard carryover balance 
which results from a prior election for the previous year either to use 
the prefunding balance or funding standard carryover balance under 
section 430(f)(3) and this paragraph (d) to offset the minimum required 
contribution for such prior plan year or to reduce those balances under 
section 430(f)(5) and paragraph (e) of this section (including deemed 
elections under section 436(f)(3) and Sec.  1.436-1(a)(5)), the prior 
plan year's prefunding and funding standard carryover balances must be 
adjusted under the rules of paragraph (b)(3) of this section for 
investment experience for that prior plan year before determining the 
amount of those balances available for such an election for the current 
plan year.
    (D) Special rule for current year elections that are made before 
prior year elections. This paragraph (d)(1)(ii)(D) sets forth a special 
rule that applies if, for the current plan year, a plan sponsor makes 
an election under this paragraph (d) or paragraph (e) of this section 
(including a deemed election under section 436(f)(3) and Sec.  1.436-
1(a)(5)), and then subsequently makes an election under this paragraph 
(d) to offset the minimum required contribution for the prior plan 
year. This special rule applies solely for purposes of determining the 
amount of prefunding and funding standard carryover balances available 
for that subsequent election. Under this special rule, in lieu of 
decreasing the funding standard carryover balance or prefunding balance 
as of the valuation date for the current year to take into account the 
current year election, the funding standard carryover balance or 
prefunding balance as of the valuation date for the prior plan year is 
decreased by the amount of the prior year equivalent of the current 
year election. The prior year equivalent of the current year election 
is determined by dividing the amount of the current year election (as 
of the first day of the current plan year) by a number equal to 1 plus 
the rate of investment return for the prior plan year determined under 
paragraph (b)(3) of this section. If this paragraph (d)(1)(ii)(D) 
applies for a plan year, then the funding standard carryover balance 
and prefunding balance are nonetheless adjusted in accordance with the 
rules of paragraph (b) of this section, after the application of the 
rules of this paragraph (d)(1)(ii)(D). Thus, the amount used to offset 
the minimum required contribution for the earlier plan year is 
subtracted from the prefunding balance or funding standard carryover 
balance as of the valuation date for that year prior to the adjustment 
for investment return under paragraph (b)(3) of this section for that 
plan year, and the amount by which the prefunding balance or funding 
standard carryover balance is decreased for the second year is based on 
the elections made for the second year.
    (2) Requirement to use funding standard carryover balance before 
prefunding balance. To the extent that a plan has a funding standard 
carryover balance greater than zero, no amount of the plan's prefunding 
balance may be used to offset the minimum required contribution. Thus, 
a plan's funding standard carryover balance must be exhausted before 
the plan's prefunding balance may be applied under paragraph (d)(1) of 
this section to offset the minimum required contribution.
    (3) Limitation for underfunded plans--(i) In general. An election 
to use the prefunding balance or funding standard carryover balance to 
offset the minimum required contribution under this paragraph (d) is 
not available for a plan year if the plan's prior plan year funding 
ratio is less than 80 percent. For purposes of this paragraph (d)(3), 
except as otherwise provided in this paragraph (d)(3) or paragraph 
(h)(3) of this section, the plan's prior plan year funding ratio is the 
fraction (expressed as a percentage)--
    (A) The numerator of which is the value of plan assets on the 
valuation date for the preceding plan year, reduced by the amount of 
any prefunding balance (but not the amount of any funding standard 
carryover balance); and
    (B) The denominator of which is the funding target of the plan for 
the preceding plan year (determined without regard to the at-risk rules 
of section 430(i)(1)).
    (ii) Special rule for second year of a new plan with no past 
service. In the case of a new plan that was neither the result of a 
merger nor involved in a spinoff, if the prior plan year was the first 
year of the plan and the funding target for the prior plan year was 
zero, then the plan's prior plan year funding ratio is deemed to be 80 
percent for purposes of this paragraph (d)(3).
    (iii) Special rule for plans that are the result of a merger. 
[Reserved]
    (iv) Special rules for plans that are involved in a spinoff. 
[Reserved]
    (e) Election to reduce balances--(1) In general. A plan sponsor may 
make an election for a plan year to reduce any portion of a plan's 
prefunding and funding standard carryover balances under this paragraph 
(e). If such an election is made, the amount of those balances that 
must be subtracted from the value of plan assets pursuant to paragraph 
(c)(1) of this section will be smaller and, accordingly, the value of 
plan assets taken into account for purposes of sections 430 and 436 
will be larger. Thus, this election to reduce a plan's prefunding and 
funding standard carryover balances is taken into account in the 
determination of the value of plan assets for the plan year and applies 
for all purposes under sections 430 and 436, including for purposes of 
determining the plan's prior plan year funding ratio under paragraph 
(d)(3) of this section for the following plan year. See also section 
436(f)(3) and 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). 
The rules of paragraph (d)(1)(ii) of this section also apply for 
purposes of determining the maximum amount of prefunding balance or 
funding standard carryover balance that is available for an election 
under this paragraph (e).
    (2) Requirement to reduce funding standard carryover balance before 
prefunding balance. To the extent that a plan has a funding standard 
carryover balance greater than zero, no election under paragraph (e)(1) 
of this section is permitted to be made that reduces the plan's 
prefunding balance. Thus, a plan must exhaust its funding standard 
carryover balance before it is permitted to make an election under 
paragraph

[[Page 53050]]

(e)(1) of this section with respect to its prefunding balance.
    (f) Elections--(1) Method of making elections--(i) In general. Any 
election under this section by the plan sponsor must be made by 
providing written notification of the election to the plan's enrolled 
actuary and the plan administrator. The written notification must set 
forth the relevant details of the election, including the specific 
dollar amount involved in the election (except as provided in paragraph 
(f)(1)(ii) of this section). Thus, except as provided in paragraph 
(f)(1)(ii) of this section, a conditional or formula-based election 
generally does not satisfy the requirements of this paragraph (f).
    (ii) Standing elections to increase or use balances. A plan sponsor 
may provide a standing election in writing to the plan's enrolled 
actuary to use the funding standard carryover balance and the 
prefunding balance to offset the minimum required contribution for the 
plan year to the extent needed to avoid an unpaid minimum required 
contribution under section 4971(c)(4) taking into account any 
contributions that are or are not made. In addition, a plan sponsor may 
provide a standing election in writing to the plan's enrolled actuary 
to add the maximum amount possible each year to the prefunding balance. 
Any election made pursuant to a standing election under this paragraph 
(f)(1)(ii) is deemed to occur on the last day available to make the 
election for the plan year as provided under paragraph (f)(2)(i) of 
this section. Any standing election under this paragraph (f)(1)(ii) 
remains in effect for the plan with respect to the enrolled actuary 
named in the election, unless--
    (A) The standing election is revoked under the rules of paragraph 
(f)(3) of this section; or
    (B) The enrolled actuary who signs the actuarial report under 
section 6059 (Schedule SB, ``Single-Employer Defined Benefit Plan 
Actuarial Information'' of Form 5500, ``Annual Return/Report of 
Employee Benefit Plan'') for the plan for the plan year is not the 
enrolled actuary named in the standing election.
    (2) Timing of elections--(i) General rule. Except as otherwise 
provided in paragraph (f)(2)(ii) or (iii) of this section, any election 
under this section with respect to a plan year must be made no later 
than the last date for making the minimum required contribution for the 
plan year as described in section 430(j)(1). For this purpose, an 
election to add to the prefunding balance relates to the plan year for 
which excess contributions were made. For example, an election to add 
to the prefunding balance as of the first day of the plan year that 
begins on January 1, 2010 (in an amount not in excess of the present 
value of the excess contribution as of the valuation date in 2009, 
adjusted for interest under the rules of paragraph (b)(1)(ii) of this 
section), must be made no later than September 15, 2010, even though 
the election is reported on the 2010 Schedule SB of Form 5500, which is 
not due until 2011. Except for the standing elections covered by 
paragraph (f)(1)(ii) of this section, an election under this section 
may not be made prior to the first day of the plan year to which the 
election relates.
    (ii) Special rule for standing election revoked by a change in 
enrolled actuary. If there is a change in enrolled actuary for the plan 
year which would result in a revocation of the standing election under 
the rule of paragraph (f)(1)(ii)(B) of this section, then the plan 
sponsor may reinstate the revoked standing election by providing a 
replacement to the new enrolled actuary by the due date of the Schedule 
SB of Form 5500.
    (iii) Election to reduce balances. Any election under paragraph (e) 
of this section to reduce the prefunding balance or funding standard 
carryover balance for a plan year (for example, in order to avoid or 
terminate a benefit restriction under section 436) must be made by the 
end of the plan year to which the election relates.
    (iv) Earlier elections. This paragraph (f)(2) sets forth the latest 
date that an election can be made. A plan sponsor is permitted to make 
an earlier election, and in certain circumstances may need to make such 
an election in order to timely satisfy a quarterly contribution 
requirement under section 430(j)(3).
    (3) Irrevocability of elections--(i) In general. Except as 
otherwise provided in this paragraph (f)(3), a plan sponsor's election 
under this section with respect to the plan's prefunding balance or 
funding standard carryover balance is irrevocable (and must be 
unconditional). A standing election by the plan sponsor may be revoked 
by providing written notification of the revocation to the plan's 
enrolled actuary and the plan administrator on or before the date the 
corresponding election is deemed to occur pursuant to paragraph 
(f)(1)(ii) of this section.
    (ii) Exception for certain elections. An election to use the 
prefunding balance or funding standard carryover balance to offset the 
minimum required contribution for a plan year (including an election to 
satisfy the quarterly contribution requirements for a plan year) is 
permitted to be revoked to the extent the amount the plan sponsor 
elected to use to offset the minimum contribution requirements 
(including an election used to satisfy the quarterly contribution 
requirements) exceeds the minimum required contribution for a plan year 
(determined without regard to the election under paragraph (d) of this 
section) if and only if the election is revoked by providing written 
notification of the revocation to the plan's enrolled actuary and the 
plan administrator by the deadline set forth in paragraph (f)(3)(iii) 
of this section. If no such revocation is made, then, under paragraph 
(b) of this section, the funding standard carryover balance or 
prefunding balance is decreased by the entire amount that the plan 
sponsor elected to use to offset the minimum required contribution for 
a plan year (including an election to satisfy the quarterly 
contribution requirements for a plan year).
    (iii) Deadline for revoking election. The deadline for revoking the 
election described in paragraph (f)(3)(ii) of this section is generally 
the end of the plan year. However, for plans with a valuation date 
other than the first day of the plan year, the deadline for the 
revocation is the deadline for contributions for the plan year as 
described in section 430(j)(1). In addition, for the first plan year 
beginning in 2008, the deadline for the revocation for all plans is 
deferred to the due date (including extensions) of the Schedule SB, 
``Single-Employer Defined Benefit Plan Actuarial Information'' of Form 
5500, ``Annual Return/Report of Employee Benefit Plan''.
    (4) Plan sponsor--(i) In general. For purposes of the elections 
described in this section, except as otherwise provided in paragraph 
(f)(4)(ii) of this section, any reference to the plan sponsor means the 
employer or employers responsible for making contributions to or under 
the plan.
    (ii) Certain multiple employer plans. For purposes of the elections 
described in this section, in the case of plans that are multiple 
employer plans to which section 413(c)(4)(A) does not apply, any 
reference to the plan sponsor means the plan administrator within the 
meaning of section 414(g).
    (g) Examples. The following examples illustrate the rules of this 
section:

    Example 1.  (i) Plan P is a defined benefit plan with a plan 
year that is the calendar year and a valuation date of January 1. 
The funding standard carryover balance of Plan P is $25,000 and the 
prefunding balance is zero as of the beginning of the 2010 plan 
year. The sponsor of Plan P, Sponsor S, does not elect to use any 
portion of the balance to offset the minimum required contribution 
for 2010 pursuant to paragraph (d)(1) of this section, or to reduce 
any portion of the funding

[[Page 53051]]

standard carryover balance prior to the determination of the value 
of plan assets for 2010, pursuant to paragraph (e)(1) of this 
section. The actual rate of return on Plan P's assets for 2010 is 
2%. Plan P's effective interest rate for 2010 is 6%. The minimum 
required contribution for Plan P under section 430 for 2010 is 
$100,000, and no quarterly installments are required for Plan P for 
the 2010 plan year. As of January 1, 2010, the value of plan assets 
is $1,100,000 and the funding target is $1,000,000. Therefore, the 
prior plan year funding ratio for Plan P for 2010, as determined 
under paragraph (d)(3) of this section, is 110%.
    (ii) Sponsor S makes a contribution to Plan P of $150,000 on 
December 1, 2010, for the 2010 plan year and makes no other 
contributions for the 2010 plan year. Because this contribution was 
made on a date other than the valuation date for the 2010 plan year, 
the contribution must be adjusted to reflect interest that would 
otherwise have accrued between the valuation date and the date of 
the contribution, at the effective interest rate for the 2010 plan 
year. The amount of the contribution after adjustment is $142,198, 
determined as $150,000 discounted for 11 months of compound interest 
at an effective annual interest rate of 6%.
    (iii) The excess of employer contributions for 2010 over the 
minimum required contribution for 2010, as of the valuation date, is 
$42,198 ($142,198 less $100,000). Accordingly, the increase in Plan 
P's prefunding balance as of January 1, 2011, cannot exceed $44,730 
(which is the present value of the excess contribution of $42,198 
adjusted for 12 months of interest at an effective interest rate of 
6%).
    (iv) Plan P's funding standard carryover balance as of January 
1, 2011, is $25,500 (which is the funding standard carryover balance 
as of January 1, 2010, adjusted for investment experience during 
2010 at a rate of 2%).
    Example 2. (i) The facts are the same as in Example 1, except 
that the contribution of $150,000 is made on February 1, 2011, for 
the 2010 plan year.
    (ii) The amount of the contribution after adjustment is 
$140,824, which is determined as $150,000 discounted for 13 months 
of interest at an effective interest rate of 6%. Accordingly, the 
increase in Plan P's prefunding balance as of January 1, 2011, 
cannot exceed $43,273 (which is the present value of the excess 
contribution of $40,824 adjusted for 12 months of interest at an 
effective interest rate of 6%).
    (iii) Plan P's funding standard carryover balance as of January 
1, 2011, is $25,500, as developed in Example 1 of this section. If 
Sponsor S elects to increase the prefunding balance as of January 1, 
2011, by the present value of the excess contribution adjusted for 
interest, or $43,273, the total of the funding standard carryover 
balance and prefunding balance as of January 1, 2011, is $68,773.
    Example 3.  (i) The facts are the same as in Example 1, except 
that Sponsor S contributes $90,539 to Plan P on February 1, 2011, 
for the 2010 plan year and makes no other contributions to Plan P 
for the 2010 plan year. In addition, on February 1, 2011, Sponsor S 
elects to use $15,000 of the funding standard carryover balance to 
offset P's minimum required contribution for 2010, pursuant to 
paragraph (d)(1) of this section. This is permitted because Plan P's 
prior-year funding ratio determined under paragraph (d)(3) of this 
section is 110%, and is therefore not less than 80%.
    (ii) Because the contribution was made on a date other than the 
valuation date for the 2010 plan year, the contribution must be 
adjusted to reflect interest that would otherwise have accrued 
between the valuation date and the date of the contribution, at the 
effective interest rate for the 2010 plan year. The amount of the 
contribution after adjustment is $85,000, determined as $90,539 
discounted for 13 months of compound interest at an effective 
interest rate of 6%. The adjusted contribution of $85,000 plus the 
$15,000 of the funding standard carryover balance used to offset the 
minimum required contribution equals the minimum required 
contribution for the 2010 plan year of $100,000. Therefore, no 
excess contributions are available to increase the prefunding 
balance, and the prefunding balance as of January 1, 2011, remains 
zero.
    (iii) The funding standard carryover balance as of January 1, 
2011, is adjusted for investment experience during the 2010 plan 
year, in accordance with paragraph (b)(3) of this section. The 
amount of the adjustment is $200, determined as the actual rate of 
return on plan assets for 2010 as applied to the 2010 funding 
standard carryover balance after reduction for the amount of that 
balance used under paragraph (d)(1) of this section (that is, 
$25,000 less $15,000, multiplied by the actual rate of return of 
2%).
    (iv) The funding standard carryover balance, as of January 1, 
2011, is $10,200, determined as the 2010 funding standard carryover 
balance less the amount used to offset the 2010 minimum required 
contribution, adjusted for investment experience during the 2010 
year ($25,000 less $15,000 plus $200).
    Example 4.  (i) The facts are the same as in Example 3, except 
that Sponsor S contributes $150,000 (instead of $90,539) to Plan P 
on February 1, 2011, for the 2010 plan year.
    (ii) Because the contribution was made on a date other than the 
valuation date for the 2010 plan year, the contribution must be 
adjusted to reflect interest that would otherwise have accrued 
between the valuation date and the date of the contribution, at the 
effective interest rate for the 2010 plan year. The amount of the 
contribution after adjustment is $140,824, determined as $150,000 
discounted for 13 months of interest at an effective interest rate 
of 6%.
    (iii) Because Sponsor S elected to use $15,000 of the funding 
standard carryover balance to offset the minimum required 
contribution for 2010 of $100,000, the cash contribution requirement 
for 2010, adjusted with interest to January 1, 2010, is $85,000. The 
adjusted contribution of $140,824 exceeds this amount by $55,824. Of 
this amount, $15,000 exceeds the minimum required contribution only 
because of Sponsor S's election to use the funding standard 
carryover balance to offset the minimum required contribution as 
provided in paragraph (d)(1) of this section. The remaining $40,824 
($140,824 minus $100,000) results from cash contributions made in 
excess of the minimum required contribution before offset by the 
funding standard carryover balance.
    (iv) The portion of the excess contribution resulting solely 
because the minimum required contribution was offset by a portion of 
the funding standard carryover balance is adjusted for investment 
experience during 2009, pursuant to paragraph (b)(3)(iii) of this 
section. Accordingly, this portion of the present value of the 
excess contribution adjusted for interest as of January 1, 2011, is 
$15,300 ($15,000 adjusted for investment experience during 2010 at a 
rate of 2%).
    (v) The excess contribution resulting from cash contributions in 
excess of the minimum required contribution before offset by the 
funding standard carryover balance is adjusted for interest at the 
effective interest rate for 2010, pursuant to paragraph 
(b)(1)(iv)(A) of this section. Accordingly, this portion of the 
present value of the excess contribution adjusted for interest as of 
January 1, 2011, is $43,273 ($40,824 increased by the effective 
interest rate of 6%). The increase in Plan P's prefunding balance as 
of January 1, 2011, cannot exceed the total present value of the 
excess contribution adjusted for interest of $58, 573 ($15,300 plus 
$43,273).
    (vi) The funding standard carryover balance as of January 1, 
2011, is $10,200, determined as the 2010 funding standard carryover 
balance less the $15,000 used to offset the 2010 minimum required 
contribution, adjusted for investment experience during the 2010 
plan year as developed in Example 3 ($25,000 less $15,000 plus 
$200).
    (vii) Sponsor S elects to increase the prefunding balance by the 
maximum amount of the present value of the excess contribution 
adjusted for interest of $58,573, resulting in a total of the 
funding standard carryover balance and the prefunding balance as of 
January 1, 2011, of $68,773, the same amount as that developed in 
Example 2.
    Example 5.  (i) Plan Q is a defined benefit plan with a plan 
year that is the calendar year and a valuation date of July 1. The 
funding standard carryover balance of Plan Q is $50,000 as of 
January 1, 2010, the beginning of the 2010 plan year. The prefunding 
balance of Plan Q as of the beginning of the 2010 plan year is $0. 
The actual rate of return on Plan Q's assets for 2010 is 10%. Plan 
Q's effective interest rate for 2010 is 6.25%. The funding ratio for 
Plan Q for 2009 (the prior plan year funding ratio with respect to 
2010, as determined under paragraph (d)(3) of this section) is 85%, 
which is not less than 80%. The minimum required contribution for 
Plan Q for 2010 is $200,000. Sponsor T makes a contribution to Plan 
Q of $190,000 on July 1, 2010, for the 2010 plan year, and makes no 
other contributions for the 2010 plan year. Sponsor T elects to use 
$10,000 of the funding standard carryover balance to offset Plan Q's 
minimum required contribution in 2010.
    (ii) Pursuant to paragraph (b)(4) of this section, the funding 
standard carryover

[[Page 53052]]

balance is increased to $51,539 as of July 1, 2010 (that is, an 
increase to reflect 6 months of interest at an effective interest 
rate of 6.25%) for the purpose of adjusting plan assets under 
paragraph (c) of this section, and for applying any election to use 
or reduce Plan Q's funding standard carryover balance under 
paragraph (d) or (e) of this section. However, Sponsor T does not 
elect in 2010 to reduce any portion of the funding standard 
carryover balance pursuant to paragraph (e) of this section. The 
funding standard carryover balance ($51,539) is subtracted from the 
value of plan assets, as of July 1, 2010, prior to the determination 
of the minimum funding contribution, and $51,539 is the maximum 
amount that may applied against the minimum required contribution.
    (iii) The value of the funding standard carryover balance as of 
January 1, 2011, is determined by first discounting the amount used 
to offset the minimum required contribution for 2010 from July 1, 
2010, to January 1, 2010, using the effective interest rate of 
6.25%, and subtracting the discounted amount from the January 1, 
2010, funding standard carryover balance. The resulting amount is 
adjusted for investment experience to January 1, 2011, using a rate 
equal to the actual rate of return on plan assets of 10% during 
2010. Thus, the $10,000 used to offset Plan Q's minimum required 
contribution as of July 1, 2010, is discounted for 6 months of 
interest, at an effective interest rate of 6.25%, to obtain an 
amount of $9,701 as of January 1, 2010. The remaining funding 
standard carryover balance as of January 1, 2010, solely for 
purposes of determining the adjustment for investment experience 
during 2010, is $40,299 ($50,000--$9,701), and the adjustment for 
investment experience is $4,030 ($40,299 x 10%). The value of the 
funding standard carryover balance as of January 1, 2011, is $44,329 
(that is, $50,000 - $9,701 + $4,030).
    Example 6.  (i) The facts are the same as in Example 5, except 
that Sponsor T contributes $200,000 on July 1, 2010, for the 2010 
plan year.
    (ii) The cash contribution required for 2010, after offsetting 
the minimum required contribution by $10,000 of the funding standard 
carryover balance in accordance with T's election, is $190,000. The 
difference, or $10,000, must be adjusted to January 1, 2011, to 
determine the maximum amount that can be added to the prefunding 
balance as of that date.
    (iii) The excess contribution is first adjusted to January 1, 
2010, by discounting for 6 months of interest using the effective 
interest rate for 2010 of 6.25%. This results in an excess 
contribution of $9,701 ($10,000 / 1.0625 \0.5\). Because this amount 
is an excess contribution solely because of Sponsor T's election to 
offset the minimum required contribution for 2010 by a portion of 
the funding standard carryover balance, the amount is then adjusted 
for investment experience during 2010 at a rate of 10%, in 
accordance with paragraph (b)(3)(iii) of this section, for a present 
value of the excess contribution adjusted for interest of $10,671 
($9,701 x 1.10) as of January 1, 2011.
    Example 7.  (i) The facts are the same as in Example 4. Plan P's 
effective interest rate for 2011 is 6.5%, and the rate of return on 
investments during 2011 is 7%. All required quarterly installments 
for the 2011 plan year were made by the applicable due dates. On 
February 1, 2012, Sponsor S elects to use $50,000 of Plan P's 
prefunding and funding standard carryover balances to offset the 
minimum required contribution for the 2011 plan year. On April 15, 
2012, Sponsor S elects to use Plan P's prefunding and funding 
standard carryover balances to offset the 2012 minimum required 
contribution by $20,000, in accordance with paragraph (d) of this 
section, in order to offset the required quarterly installment then 
due.
    (ii) When adjusting Plan P's prefunding and funding standard 
carryover balances to reflect Sponsor S's election to use them to 
offset the 2011 minimum required contribution, the remaining $10,200 
in the funding standard carryover balance as of January 1, 2011, 
must be used before any portion of the prefunding balance. The 
prefunding balance is reduced by the remaining $39,800 ($50,000 
total election minus $10,200 from the funding standard carryover 
balance).
    (iii) The amount available for Sponsor S's election to use Plan 
P's prefunding and funding standard carryover balances to offset the 
2012 minimum required contribution is determined by reducing the 
January 1, 2011, prefunding and funding standard carryover balances 
to reflect the election to use the prefunding and funding standard 
carryover balances to offset the 2011 minimum required contribution, 
and by adjusting the resulting amount to January 1, 2012, using the 
rate of investment return for Plan P during 2011. Accordingly, the 
available amount in Plan P's funding standard carryover balance as 
of January 1, 2012, is zero. The available amount in Plan P's 
prefunding balance as of January 1, 2012, is $20,087 ($58,573 minus 
$39,800, increased by 7%). Therefore, Sponsor S has $20,087 
available to offset the minimum required contribution for the 2012 
plan year.
    Example 8. (i) The facts are the same as in Example 7, except 
that based on the enrolled actuary's certification of the AFTAP on 
July 1, 2012, Sponsor S is deemed to elect to reduce the January 1, 
2012, prefunding balance by $15,000 under section 436(f)(3).
    (ii) In accordance with paragraph (d)(1)(ii)(B) of this section, 
the deemed election to reduce the prefunding balance is deemed to 
occur on the first day of the plan year, and before the date of any 
election to offset the minimum required contribution for the 2012 
plan year. The deemed election does not affect Sponsor S's election 
to offset the 2011 minimum contribution because that election was 
made on February 1, 2012, before the date of the deemed election, 
July 1, 2012.
    (iii) As shown in Example 7, the available prefunding balance as 
of January 1, 2012, after reflecting the February 1, 2012, election 
to offset the 2011 minimum required contribution but before 
reflecting the April 15, 2012, election to offset the 2012 minimum 
required contribution, is $20,087. Adjusting this amount to reflect 
the deemed election to reduce the prefunding balance by $15,000 
leaves a balance of $5,087 available to offset the minimum required 
contribution for 2012.
    (iv) The portion of the quarterly installment due April 15, 2012 
that was not covered by the remaining $5,087 prefunding balance is 
considered unpaid retroactive to April 15, 2012.>
    Example 9.  (i) The facts are the same as in Example 8, except 
that Sponsor S does not make the election to offset the 2011 minimum 
required contribution until August 1, 2012, and the deemed election 
as of July 1, 2012, reduces Plan P's prefunding and funding standard 
carryover balances as of January 1, 2012, by $68,500. Sponsor S does 
not elect to use Plan P's prefunding and funding standard carryover 
balances to offset the 2012 minimum contribution.
    (ii) In accordance with paragraph (d)(1)(ii)(A) of this section, 
the July 1, 2012, deemed election to reduce Plan P's prefunding and 
funding standard carryover balances must be taken into account 
before determining the amount available to offset the 2011 minimum 
required contribution because the election to offset the 2011 
minimum required contribution was made after the date of the deemed 
election, July 1, 2012.
    (iii) Pursuant to paragraph (d)(1)(ii)(C) of this section, the 
January 1, 2011, prefunding and funding standard carryover balances 
are adjusted to January 1, 2012, using Plan P's rate of investment 
return for 2011 of 7%. This results in an available funding standard 
carryover balance of $10,914 ($10,200 x 1.07) and an available 
prefunding balance of $62,673 (58,573 x 1.07) as of January 1, 2012.
    (iv) Paragraph (d)(2) of this section requires that the funding 
standard carryover balance must be used before reducing Plan P's 
prefunding balance. Accordingly, the funding standard carryover 
balance is eliminated, and the prefunding balance is reduced by the 
remaining $57,586 ($68,500 - $10,914), resulting in an available 
prefunding balance of $5,087 ($62,673 - $57,586) as of January 1, 
2012.
    (v) In accordance with paragraph (d)(1)(ii)(D) of this section, 
the remaining balance is adjusted to January 1, 2011, to determine 
the amount available to offset the 2011 minimum required 
contribution. This adjustment is done by dividing the remaining 
balance by 1 plus the rate of investment return for 2011. 
Accordingly, the amount available to offset the 2011 minimum 
required contribution is $4,754 ($5,087 / 1.07).
    (vi) If the plan sponsor elects to use the $4,754 available 
balance to offset the 2011 minimum required contribution, the 
funding standard carryover balance as of January 1, 2012 (prior to 
the deemed reduction under section 436(f)(3)) is $5,827 ($10,200 
less $4,754, plus $381 for investment experience at a rate of 7%). 
The prefunding balance as of January 1, 2012 (prior to the deemed 
reduction under section 436(f)(3)) is $62,673 (that is, $58,573 x 
1.07). The deemed election to reduce Plan P's balance is first 
applied to eliminate the funding standard carryover balance, and the 
remaining $62,673 ($68,500 less $5,827) reduces the January 1, 2012, 
prefunding balance to zero.


[[Page 53053]]


    Example 10.  (i) Plan V is a defined benefit plan with a plan 
year that is the calendar year and a valuation date of December 31. 
The valuation is based on the fair market value of plan assets, 
which amounts to $1,000,000 as of December 31, 2010, before any 
adjustments. As of January 1, 2010, Plan V's funding standard 
carryover balance is $0 and its prefunding balance is $125,000. Plan 
V's effective interest rate for 2010 is 5.5%. The enrolled actuary's 
certification of AFTAP for 2010 on March 31, 2010, results in a 
deemed reduction of $15,000 in the plan's prefunding balance as of 
January 1, 2010. Plan V's sponsor elected to use the prefunding 
balance to offset any portion of the minimum required contribution 
for 2010 not covered by cash contributions.
    (ii) In accordance with paragraph (b)(4)(i) of this section, the 
amount of the prefunding balance subtracted from plan assets is 
increased from the first day of the plan year to the valuation date 
using the effective interest rate of 5.5% for 2009. Accordingly, the 
prefunding balance used for this purpose is $116,050 [($125,000 - 
$15,000 deemed reduction) x 1.055].
    (iii) The fair market value of plan assets used for the December 
31, 2010, valuation is $883,950 ($1,000,000 - $116,050).
    Example 11.  (i) The facts are the same as in Example 10. The 
minimum contribution for Plan V for the 2010 plan year is $45,000; 
no quarterly installments are required for Plan V for 2010. Plan V's 
sponsor makes a contribution of $20,000 for the 2010 plan year on 
July 1, 2011. The actual rate of return on assets for Plan V during 
2010 is 10%.
    (ii) The contribution of $20,000 is discounted to December 31, 
2010, using the effective interest rate of 5.5% to determine the 
remaining balance of the 2010 minimum required contribution. 
Accordingly, the contribution is adjusted to $19,472 ($20,000 / 
1.055 \0.5\) as of December 31, 2010, and the balance of the minimum 
required contribution is $25,528 ($45,000 - $19,472). This balance 
will be covered by the plan sponsor's election to use the prefunding 
balance to offset any portion of the minimum required contribution 
not covered by cash contributions.
    (iii) Under section (b)(4)(ii) of this section, the amount used 
to offset the 2010 minimum required contribution for the purpose of 
adjusting the prefunding balance is discounted to January 1, 2010, 
using the effective interest rate for 2010. This amount is 
calculated as $24,197 ($25,528 / 1.055).
    (iv) The prefunding balance as of January 1, 2011, is reduced by 
the deemed election of $15,000 and the discounted amount used to 
offset the 2010 minimum required contribution ($24,197), and 
adjusted for investment experience for 2010 using the actual rate of 
return of 10%. Accordingly, the prefunding balance as of January 1, 
2011 is $94,383 [($125,000 - $15,000 - $24,197) x 1.10].
    Example 12.  (i) The facts are the same as in Example 11, except 
that the enrolled actuary's certification of the AFTAP as of March 
31, 2011, results in a deemed reduction of the prefunding balance as 
of January 1, 2011, of $75,000.
    (ii) Under paragraph (d)(1)(ii) of this section, the deemed 
reduction of the prefunding balance is applied before the election 
to use the prefunding balance to offset the balance of the minimum 
required contribution for 2010. To determine the amount of the 
prefunding balance available to cover the remaining minimum required 
contribution for 2010, the deemed reduction is adjusted for 
investment experience to January 1, 2010, using the actual rate of 
return of 10% for 2010. Accordingly, the adjusted deemed reduction 
is $68,182 ($75,000 / 1.10) and the available prefunding balance as 
of January 1, 2010, is $41,818 ($125,000 - $15,000 adjusted deemed 
reduction for 2010 - $68,182 adjusted deemed reduction for 2011).
    (iii) This amount is then adjusted to December 31, 2010, using 
the effective interest rate of 5.5%. The amount of the prefunding 
balance available to offset the 2009 minimum required contribution 
as of December 31, 2010, is $44,118 ($41,818 x 1.055). This amount 
is larger than the election made by Plan V's sponsor to offset the 
minimum required contribution for 2010 ($25,528) and so the election 
remains valid.

    (h) Effective/applicability date and transition rules--(1) 
Statutory effective date/applicability date. Section 430 generally 
applies to plan years beginning on or after January 1, 2008. The 
applicability of section 430 for purposes of determining the minimum 
required contribution is delayed for certain plans in accordance with 
sections 104 through 106 of PPA '06.
    (2) Effective date/applicability date of regulations. This section 
applies to plan years beginning on or after January 1, 2010. For plan 
years beginning before January 1, 2010, plans are permitted to rely on 
the provisions set forth in this section for purposes of satisfying the 
requirements of section 430.
    (3) Special lookback rule for 2007 plan year's funding ratio--(i) 
Plan assets. For purposes of determining a plan's prior plan year 
funding ratio under paragraph (d)(3) of this section with respect to 
the first plan year beginning on or after January 1, 2008, the value of 
plan assets on the valuation date of the preceding plan year (the 
``2007 plan year'') is determined under section 412(c)(2) as in effect 
for the 2007 plan year, except that, for this purpose--
    (A) If the value of plan assets is less than 90 percent of the fair 
market value of plan assets for the 2007 plan year on that date, such 
value is considered to be 90 percent of the fair market value; and
    (B) If the value of plan assets is greater than 110 percent of the 
fair market value of plan assets for the 2007 plan year on that date, 
such value is considered to be 110 percent of the fair market value.
    (ii) Funding target. For purposes of determining a plan's prior 
plan year funding ratio under paragraph (d)(3) of this section with 
respect to the first plan year beginning on or after January 1, 2008, 
the funding target of the plan for the preceding plan year is equal to 
the plan's current liability under section 412(l)(7) (as in effect 
prior to amendment by PPA '06) on the valuation date for the 2007 plan 
year.
    (iii) Special rules for new plans, mergers, and spinoffs. In the 
case of a plan described in paragraph (d)(3)(ii), (d)(3)(iii), or 
(d)(3)(iv) of this section, the plan's prior plan year funding ratio 
with respect to the first plan year beginning on or after January 1, 
2008 is determined using rules similar to the rules of paragraphs 
(d)(3)(ii), (d)(3)(iii), and (d)(3)(iv) of this section.
    (4) First effective plan year. For purposes of this section, the 
term first effective plan year means the first plan year beginning on 
or after the date section 430 applies for purposes of determining the 
minimum required contribution for the plan.
    (5) Pre-effective plan year. For purposes of this section, the term 
pre-effective plan year means the plan year immediately preceding the 
first effective plan year.

0
Par. 4. Section 1.430(g)-1 is added to read as follows:


Sec.  1.430(g)-1  Valuation date and valuation of plan assets.

    (a) In general--(1) Overview. This section provides rules relating 
to a plan's valuation date and the valuation of a plan's assets for a 
plan year under section 430(g). Section 430 and this section apply to 
single employer defined benefit plans (including multiple employer 
plans as defined in section 413(c)) that are subject to the rules of 
section 412, but do not apply to multiemployer plans (as defined in 
section 414(f)). Paragraph (b) of this section describes valuation date 
rules. Paragraph (c) of this section describes rules regarding the 
determination of the asset value for purposes of a plan's actuarial 
valuation. Paragraph (d) of this section contains rules for taking 
employer contributions into account in the determination of the value 
of plan assets. Paragraph (e) of this section contains examples. 
Paragraph (f) of this section sets forth effective/applicability dates 
and transition rules.
    (2) Special rules for multiple employer plans. In the case of a 
multiple employer plan to which section 413(c)(4)(A) applies, the rules 
of section 430 and this section are applied separately for each 
employer under the plan as if each employer maintained a separate plan. 
Thus, in such a case, the value of plan assets is determined separately 
for each employer under the plan. In the case of a multiple employer

[[Page 53054]]

plan to which section 413(c)(4)(A) does not apply (that is, a plan 
described in section 413(c)(4)(B) that has not made the election for 
section 413(c)(4)(A) to apply), the rules of section 430 and this 
section are applied as if all participants in the plan were employed by 
a single employer.
    (b) Valuation date--(1) In general. The determination of the 
funding target, target normal cost, and value of plan assets for a plan 
year is made as of the valuation date for that plan year. Except as 
otherwise provided in paragraph (b)(2) of this section, the valuation 
date for any plan year is the first day of the plan year.
    (2) Exception for small plans--(i) In general. If, on each day 
during the preceding plan year, a plan had 100 or fewer participants 
determined by applying the rules of Sec.  1.430(d)-1(e)(1) and (2) 
(including active and inactive participants and all other individuals 
entitled to future benefits), then the plan may designate any day 
during the plan year as its valuation date for that plan year and 
succeeding plan years. For purposes of this paragraph (b)(2)(i), all 
defined benefit plans (other than multiemployer plans as defined in 
section 414(f)) maintained by an employer are treated as one plan, but 
only participants with respect to that employer are taken into account.
    (ii) Employer determination. For purposes of this paragraph (b)(2), 
the employer includes all members of the employer's controlled group 
determined pursuant to section 414(b), (c), (m), and (o) and includes 
any predecessor of the employer that, during the prior year, employed 
any employees of the employer who are covered by the plan.
    (iii) Application of exception in first plan year. In the case of 
the first plan year of any plan, the exception for small plans under 
paragraph (b)(2)(i) of this section is applied by taking into account 
the number of participants that the plan is reasonably expected to have 
on each day during the first plan year.
    (iv) Valuation date is part of funding method. The selection of a 
plan's valuation date is part of the plan's funding method and, 
accordingly, may only be changed with the consent of the Commissioner. 
A change of a plan's valuation date that is required by section 430 is 
treated as having been approved by the Commissioner and does not 
require the Commissioner's prior specific approval. Thus, if a plan 
that ceases to be eligible for the small plan exception under this 
paragraph (b)(2) for a plan year because the number of participants 
exceeded 100 in the prior plan year, then the resulting change in the 
valuation date to the first day of the plan year is automatically 
approved by the Commissioner.
    (c) Determination of asset value--(1) In general--(i) General use 
of fair market value. Except as otherwise provided in this paragraph 
(c), the value of plan assets for purposes of section 430 is equal to 
the fair market value of plan assets on the valuation date. Prior year 
contributions made after the valuation date and current year 
contributions made before the valuation date are taken into account to 
the extent provided in paragraph (d) of this section.
    (ii) Fair market value. The fair market value of an asset is 
determined as the price at which the asset would change hands between a 
willing buyer and a willing seller, neither being under any compulsion 
to buy or sell and both having reasonable knowledge of relevant facts. 
Except as otherwise provided by the Commissioner, any guidance on the 
valuation of insurance contracts under Subchapter D of Chapter 1 the 
Internal Revenue Code applies for purposes of this paragraph 
(c)(1)(ii).
    (2) Averaging of fair market values--(i) In general. Subject to the 
plan asset corridor rules of paragraph (c)(2)(iii) of this section, a 
plan is permitted to determine the value of plan assets on the 
valuation date as the average of the fair market value of assets on the 
valuation date and the adjusted fair market value of assets determined 
for one or more earlier determination dates (adjusted using the method 
described in paragraph (c)(2)(ii) of this section). The method of 
determining the value of assets is part of the plan's funding method 
and, accordingly, may only be changed with the consent of the 
Commissioner.
    (ii) Adjusted fair market value--(A) Determination dates. The 
period of time between each determination date (treating the valuation 
date as a determination date) must be equal and that period of time 
cannot exceed 12 months. In addition, the earliest determination date 
with respect to a plan year cannot be earlier than the last day of the 
25th month before the valuation date of the plan year (or a similar 
period in the case of a valuation date that is not the first day of a 
month). In a typical situation, the earlier determination dates will be 
the two immediately preceding valuation dates. However, these rules 
also permit the use of more frequent determination dates. For example, 
monthly or quarterly determination dates may be used.
    (B) Adjustments for contributions and distributions. The adjusted 
fair market value of plan assets for a prior determination date is the 
fair market value of plan assets on that date, increased for 
contributions included in the plan's asset balance on the valuation 
date that were not included in the plan's asset balance on the earlier 
determination date, reduced for benefits and all other amounts paid 
from plan assets during the period beginning with the prior 
determination date and ending immediately before the valuation date, 
and adjusted for expected earnings as described in paragraph 
(c)(2)(ii)(D) of this section. For this purpose, the fair market value 
of assets as of a determination date includes any contribution for a 
plan year that ends with or prior to the determination date that is 
receivable as of the determination date (but only if the contribution 
is actually made within 8\1/2\ months after the end of the applicable 
plan year). If the contribution that is receivable as of the 
determination date is for a plan year beginning on or after January 1, 
2008, then only the present value as of the determination date 
(determined using the effective interest rate under section 
430(h)(2)(A) for the plan year for which the contribution is made) is 
included in the fair market value of assets.
    (C) Treatment of spin-offs and plan-to-plan transfers. For purposes 
of determining the adjusted fair market value of plan assets, assets 
spun-off from a plan as a result of a spin-off described in Sec.  
1.414(l)-1(b)(4) are treated as an amount paid from plan assets. Except 
as otherwise provided by the Commissioner, for purposes of determining 
the adjusted fair market value of plan assets, assets that are added to 
a plan as a result of a plan-to-plan transfer described in Sec.  
1.414(l)-1(b)(3) are treated in the same manner as contributions.
    (D) Adjustments for expected earnings. [Reserved]
    (E) Assumed rate of return. [Reserved]
    (F) Limitation on the assumed rate of return for periods within 
plan years for which the three segment rates were used. [Reserved]
    (G) Limitation on the assumed rate of return for periods within 
plan years for which the full yield curve was used. [Reserved]
    (iii) Restriction to 90-110 percent corridor--(A) In general. This 
paragraph (c)(2)(iii) provides rules for applying the 90 to 110 percent 
corridor set forth in section 430(g)(3)(B)(iii). The rules for 
accounting for contribution receipts under paragraphs (d)(1) and (d)(2) 
of this section are applied prior to the application of the 90 to 110 
percent corridor under this paragraph (c)(2)(iii).
    (B) Asset value less than 90 percent of fair market value. If the 
value of plan

[[Page 53055]]

assets determined under paragraph (c)(2)(i) of this section is less 
than 90 percent of the fair market value of plan assets, then the value 
of plan assets under this paragraph (c)(2) is equal to 90 percent of 
the fair market value of plan assets.
    (C) Asset value greater than 110 percent of fair market value. If 
the value of plan assets determined under paragraph (c)(2)(i) of this 
section is greater than 110 percent of the fair market value of plan 
assets, then the value of plan assets under this paragraph (c)(2) is 
equal to 110 percent of the fair market value of plan assets.
    (3) Qualified transfers to health benefit accounts. In the case of 
a qualified transfer (as defined in section 420), any assets so 
transferred are not treated as plan assets for purposes of section 430 
and this section.
    (d) Accounting for contribution receipts--(1) Prior year 
contributions--(i) In general. For purposes of determining the value of 
plan assets under paragraph (c) of this section, if an employer makes a 
contribution to the plan after the valuation date for the current plan 
year and the contribution is for an earlier plan year, then the present 
value of the contribution determined as of that valuation date is taken 
into account as an asset of the plan as of the valuation date, but only 
if the contribution is made before the deadline for contributions as 
described in section 430(j)(1) for the plan year immediately preceding 
the current plan year. For this purpose, the present value is 
determined using the effective interest rate under section 430(h)(2)(A) 
for the plan year for which the contribution is made.
    (ii) Special rule for contributions for the 2007 plan year--(A) 
Timely contributions. Notwithstanding paragraph (d)(1)(i) of this 
section, if the employer makes a contribution to the plan after the 
valuation date for the first plan year that begins on or after January 
1, 2008, and the contribution is for the immediately preceding plan 
year and is made by the deadline for contributions for that preceding 
plan year under section 412(c)(10) (as in effect before amendment by 
the Pension Protection Act of 2006 (PPA '06), Public Law 109-280 (120 
Stat. 780)), then the contribution is taken into account as a plan 
asset under paragraph (d)(1)(i) of this section without applying any 
present value discount.
    (B) Late contributions. If a contribution is for the plan year that 
immediately precedes the first plan year that begins on or after 
January 1, 2008, and is not described in paragraph (d)(1)(ii)(A) of 
this section, then the rules of paragraph (d)(1)(i) apply to the 
contribution except that the present value is determined using the 
valuation interest rate under section 412(c)(2) for that plan year.
    (iii) Ordering rules. For purposes of this paragraph (d)(1), the 
ordering rules of section 4971(c)(4)(B) apply for purposes of 
determining the plan year for which a contribution is made.
    (2) Current year contributions made before valuation date. In the 
case of a plan with a valuation date that is not the first day of the 
plan year, for purposes of determining the value of plan assets under 
paragraph (c) of this section, if an employer makes a contribution for 
a plan year before that year's valuation date, that contribution (and 
any interest on the contribution for the period between the 
contribution date and the valuation date, determined using the 
effective interest rate under section 430(h)(2)(A) for the plan year) 
must be subtracted from plan assets in determining the value of plan 
assets as of the valuation date. If the result of this subtraction is a 
number less than zero, the value of plan assets as of the valuation 
date is equal to zero.
    (e) Examples. [Reserved]
    (f) Effective/applicability dates and transition rules--(1) 
Statutory effective date/applicability date. Section 430 generally 
applies to plan years beginning on or after January 1, 2008. The 
applicability of section 430 for purposes of determining the minimum 
required contribution is delayed for certain plans in accordance with 
sections 104 through 106 of PPA '06.
    (2) Effective date/applicability date of regulations--(i) In 
general. This section applies to plan years beginning on or after 
January 1, 2010, regardless of whether section 430 applies to determine 
the minimum required contribution for the plan year. For plan years 
beginning before January 1, 2010, plans are permitted to rely on the 
provisions set forth in this section for purposes of satisfying the 
requirements of section 430.
    (ii) Permission to use averaging for 2008. For purposes of 
determining the actuarial value of assets for a plan year beginning 
during 2008 using the averaging rules of paragraph (c)(2) of this 
section, a plan is permitted to apply an assumed earnings rate of zero 
under paragraph (c)(2)(ii)(E) of this section (even if zero is not the 
actuary's best estimate of the anticipated annual rate of return on 
plan assets).
    (3) Approval for changes in the valuation date and valuation 
method. Any change in a plan's valuation date or asset valuation method 
that satisfies the rules of this section and is made for either the 
first plan year beginning in 2008, the first plan year beginning in 
2009, or the first plan year beginning in 2010 is treated as having 
been approved by the Commissioner and does not require the 
Commissioner's specific prior approval. In addition, a change in a 
plan's valuation date or asset valuation method for the first plan year 
to which section 430 applies to determine the plan's minimum required 
contribution (even if that plan year begins after December 31, 2010) 
that satisfies the rules of this section is treated as having been 
approved by the Commissioner and does not require the Commissioner's 
specific prior approval.

0
Par. 5. Section 1.430(h)(2)-1 is added to read as follows:


Sec.  1.430(h)(2)-1  Interest rates used to determine present value.

    (a) In general--(1) Overview. This section provides rules relating 
to the interest rates to be applied for a plan year under section 
430(h)(2). Section 430(h)(2) and this section apply to single employer 
defined benefit plans (including multiple employer plans as defined in 
section 413(c)) that are subject to section 412 but do not apply to 
multiemployer plans (as defined in section 414(f)). Paragraph (b) of 
this section describes how the segment interest rates are used for a 
plan year. Paragraph (c) of this section describes those segment rates. 
Paragraph (d) of this section describes the monthly corporate bond 
yield curve that is used to develop the segment rates. Paragraph (e) of 
this section describes certain elections that are permitted to be made 
under this section. Paragraph (f) of this section describes other rules 
related to interest rates. Paragraph (g) of this section contains 
examples. Paragraph (h) of this section contains effective/
applicability dates and transition rules.
    (2) Special rules for multiple employer plans. In the case of a 
multiple employer plan to which section 413(c)(4)(A) applies, the rules 
of section 430 and this section are applied separately for each 
employer under the plan as if each employer maintained a separate plan. 
Thus, each employer under such a multiple employer plan may make 
elections with respect to the interest rate rules under this section 
that are independent of the elections of other employers under the 
plan. In the case of a multiple employer plan to which section 
413(c)(4)(A) does not apply (that is, a plan described in section 
413(c)(4)(B) that has not made the election for section 413(c)(4)(A) to 
apply), the rules of section 430 and this section are applied as if all 
participants

[[Page 53056]]

in the plan were employed by a single employer.
    (b) Interest rates for determining plan liabilities--(1) In 
general. The interest rates used in determining the present value of 
the benefits that are included in the target normal cost and the 
funding target for the plan for a plan year are determined as set forth 
in this paragraph (b).
    (2) Benefits payable within 5 years--(i) Plans with valuation dates 
at the beginning of the plan year. If the valuation date is the first 
day of the plan year, in the case of benefits expected to be payable 
during the 5-year period beginning on the valuation date for the plan 
year, the interest rate used in determining the present value of the 
benefits that are included in the target normal cost and the funding 
target for the plan is the first segment rate with respect to the 
applicable month, as described in paragraph (c)(2)(i) of this section.
    (ii) Plans with valuation dates other than the first day of the 
plan year. [Reserved]
    (3) Benefits payable after 5 years and within 20 years. In the case 
of benefits expected to be payable during the 15-year period beginning 
after the end of the period described in paragraph (b)(2) of this 
section, the interest rate used in determining the present value of the 
benefits that are included in the target normal cost and the funding 
target for the plan is the second segment rate with respect to the 
applicable month, as described in paragraph (c)(2)(ii) of this section.
    (4) Benefits payable after 20 years. In the case of benefits 
expected to be payable after the period described in paragraph (b)(3) 
of this section, the interest rate used in determining the present 
value of the benefits that are included in the target normal cost and 
the funding target for the plan is the third segment rate with respect 
to the applicable month, as described in paragraph (c)(2)(iii) of this 
section.
    (5) Applicable month. Except as otherwise provided in paragraph (e) 
of this section, the term applicable month for purposes of this 
paragraph (b) means the month that includes the valuation date of the 
plan for the plan year.
    (6) Special rule for certain airlines--(i) In general. Pursuant to 
section 6615 of the U.S. Troop Readiness, Veterans' Care, Katrina 
Recovery, and Iraq Accountability Appropriations Act, 2007, Public Law 
110-28 (121 Stat. 112), for a plan sponsor that makes the election 
described in section 402(a)(2) of the Pension Protection Act of 2006 
(PPA '06), Public Law 109-280 (120 Stat. 780), the interest rate 
required to be used to determine the plan's funding target for each of 
the 10 years under that election is 8.25 percent (rather than the 
segment rates otherwise described in this paragraph (b) or the full 
yield curve as permitted under paragraph (e)(4) of this section).
    (ii) Special interest rate not applicable for other purposes. The 
special interest rate described in paragraph (b)(6)(i) of this section 
does not apply for other purposes such as the determination of the 
plan's target normal cost.
    (c) Segment rates--(1) Overview. This paragraph (c) sets forth 
rules for determining the first, second, and third segment rates for 
purposes of paragraph (b) of this section. The first, second, and third 
segment rates are set forth in revenue rulings, notices, or other 
guidance published in the Internal Revenue Bulletin. See Sec.  
601.601(d)(2) relating to objectives and standards for publishing 
regulations, revenue rulings and revenue procedures in the Internal 
Revenue Bulletin. See paragraph (h)(4) of this section for a transition 
rule under which the definition of the segment rates is modified for 
plan years beginning in 2008 and 2009.
    (2) Definition of segment rates--(i) First segment rate. For 
purposes of this section, except as otherwise provided under the 
transition rule of paragraph (h)(4) of this section, the first segment 
rate is, with respect to any month, the single rate of interest 
determined by the Commissioner on the basis of the average of the 
monthly corporate bond yield curves (described in paragraph (d) of this 
section) for the 24-month period ending with the month preceding that 
month, taking into account only the first 5 years of each of those 
yield curves.
    (ii) Second segment rate. For purposes of this section, except as 
otherwise provided under the transition rule of paragraph (h)(4) of 
this section, the second segment rate is, with respect to any month, 
the single rate of interest determined by the Commissioner on the basis 
of the average of the monthly corporate bond yield curves (described in 
paragraph (d) of this section) for the 24-month period ending with the 
month preceding that month, taking into account only the portion of 
each of those yield curves corresponding to the 15-year period that 
follows the end of the 5-year period described in paragraph (c)(2)(i) 
of this section.
    (iii) Third segment rate. For purposes of this section, except as 
otherwise provided under the transition rule of paragraph (h)(4) of 
this section, the third segment rate is, with respect to any month, the 
single rate of interest determined by the Commissioner on the basis of 
the average of the monthly corporate bond yield curves (described in 
paragraph (d) of this section) for the 24-month period ending with the 
month preceding that month, taking into account only the portion of 
each of those yield curves corresponding to the 40-year period that 
follows the end of the 15-year period described in paragraph (c)(2)(ii) 
of this section.
    (d) Monthly corporate bond yield curve--(1) In general. For 
purposes of this section, the monthly corporate bond yield curve is, 
with respect to any month, a yield curve that is prescribed by the 
Commissioner for that month based on yields for that month on 
investment grade corporate bonds with varying maturities that are in 
the top three quality levels available.
    (2) Determination and publication of yield curve. A description of 
the methodology for determining the monthly corporate bond yield curve 
is provided in guidance issued by the Commissioner that is published in 
the Internal Revenue Bulletin. The yield curve for a month will be set 
forth in revenue rulings, notices, or other guidance published in the 
Internal Revenue Bulletin. See Sec.  601.601(d)(2) relating to 
objectives and standards for publishing regulations, revenue rulings 
and revenue procedures in the Internal Revenue Bulletin.
    (e) Elections--(1) In general. This paragraph (e) describes 
elections for a plan year that a plan sponsor can make to use 
alternative interest rates under this section. Any election under this 
paragraph (e) must be made by providing written notification of the 
election to the plan's enrolled actuary. Any election in this paragraph 
(e) may be adopted for a plan year without obtaining the consent of the 
Commissioner, but, once adopted, that election will apply for that plan 
year and all future plan years and may be changed only with the consent 
of the Commissioner.
    (2) Election for alternative applicable month. As an alternative to 
defining the applicable month as the month that includes the valuation 
date for the plan year, a plan sponsor that is using segment rates as 
provided under paragraph (b) of this section may elect to use one of 
the 4 months preceding that month as the applicable month.
    (3) Election not to apply transition rule. The plan sponsor may 
elect not to apply the transition rule in paragraph (h)(4) of this 
section.
    (4) Election to use full yield curve--(i) In general. For purposes 
of determining the plan's funding target and target normal cost, and 
for all other purposes under section 430 (including the determination 
of shortfall

[[Page 53057]]

amortization installments, waiver installments, and the present values 
of those installments as described in paragraph (f)(2) of this 
section), the plan sponsor may elect to use interest rates under the 
monthly corporate bond yield curve described in paragraph (d) of this 
section for the month preceding the month that includes the valuation 
date in lieu of the segment rates determined under paragraph (c) of 
this section. In order to address the timing of benefit payments during 
a year, reasonable approximations are permitted to be used to value 
benefit payments that are expected to be made during a plan year.
    (ii) Reasonable techniques permitted. In the case of a plan sponsor 
using the monthly corporate bond yield curve under this paragraph 
(e)(4), if with respect to a decrement the benefit is only expected to 
be paid for one-half of a year (because the decrement was assumed to 
occur in the middle of the year), the interest rate for that year can 
be determined as if the benefit were being paid for the entire year. 
See Sec.  1.430(d)-1(f)(7) for additional reasonable techniques that 
can be used in determining present value.
    (5) Plan sponsor. For purposes of the elections described in this 
section, any reference to the plan sponsor generally means the employer 
or employers responsible for making contributions to or under the plan. 
In the case of plans that are multiple employer plans to which section 
413(c)(4)(A) does not apply, any reference to the plan sponsor means 
the plan administrator within the meaning of section 414(g).
    (f) Interest rates used for other purposes--(1) Effective interest 
rate--(i) In general. Except as otherwise provided in paragraph (f)(2) 
of this section, the effective interest rate determined under section 
430(h)(2)(A) for the plan year is the single interest rate that, if 
used to determine the present value of the benefits that are taken into 
account in determining the plan's funding target for the plan year, 
would result in an amount equal to the plan's funding target determined 
for the plan year under section 430(d) as described in Sec.  1.430(d)-
1(b)(2) (without regard to calculations for plans in at-risk status 
under section 430(i)).
    (ii) Zero funding target. If, for the plan year, the plan's funding 
target is equal to zero, then the effective interest rate determined 
under section 430(h)(2)(A) for the plan year is the single interest 
rate that, if used to determine the present value of the benefits that 
are taken into account in determining the plan's target normal cost for 
the plan year, would result in an amount equal to the plan's target 
normal cost determined for the plan year under section 430(b) as 
described in Sec.  1.430(d)-1(b)(1) (without regard to calculations for 
plans in at-risk status under section 430(i)).
    (2) Interest rates used for determining shortfall amortization 
installments and waiver amortization installments. The interest rates 
used to determine the amount of shortfall amortization installments and 
waiver amortization installments and the present value of those 
installments are determined based on the dates those installments are 
assumed to be paid, using the same timing rules that apply in 
determining target normal cost as described in paragraph (b) of this 
section. Thus, for a plan that uses the segment rates described in 
paragraph (c) of this section, the first segment rate applies to the 
installments assumed to be paid during the first 5-year period 
beginning on the valuation date for the plan year, and the second 
segment rate applies to the installments assumed to be paid during the 
subsequent 15-year period. For purposes of this paragraph (f)(2), the 
shortfall amortization installments for a plan year are assumed to be 
paid on the valuation date for that plan year. For example, for a plan 
that uses the segment rates described in paragraph (c) of this section, 
the shortfall amortization installment for the fifth plan year 
following the current plan year (the sixth installment) is assumed to 
be paid on the valuation date for that year so that such shortfall 
amortization installment will be determined using the second segment 
rate.
    (g) Examples. The following examples illustrate the rules of this 
section:

    Example 1. (i) The January 1, 2009, valuation of Plan P is 
performed using the segment rates applicable for September 2008 
(determined without regard to the transition rule of section 
430(h)(2)(G)), and the 2009 annuitant and nonannuitant (male and 
female) mortality tables as published in Notice 2008-85. See Sec.  
601.601(d)(2) relating to objectives and standards for publishing 
regulations, revenue rulings and revenue procedures in the Internal 
Revenue Bulletin. Plan P provides for early retirement benefits as 
early as age 50, and offers a single-sum distribution payable 
immediately at retirement. The single-sum payment is equal to the 
present value of the participant's accrued benefit, based on the 
applicable interest rates and the applicable mortality table under 
section 417(e)(3). Participant E is the only participant in the 
plan, and is a male age 46 as of January 1, 2009, with an annual 
accrued benefit of $23,000 payable beginning at age 65. The actuary 
assumes a 100% probability that Participant E will terminate at age 
50 and will elect to receive his benefit in the form of a single-sum 
payment.
    (ii) Plan P's funding target is $68,908 as of January 1, 2009. 
This figure is based on the male nonannuitant rates for ages prior 
to age 50, the applicable mortality rates under section 417(e)(3) 
for ages 50 and later, and segment interest rates of 5.07% for the 
first 5 years after the valuation date, 6.09% for the next 15 years, 
and 6.56% for periods more than 20 years after the valuation date. 
(See Sec.  1.430(d)-1(f)(9), Example 10, for additional details.)
    (iii) The present value of Participant E's benefits as of 
January 1, 2009, is $68,908 if a single interest rate of 6.52805% is 
substituted for the segment interest rates but all other assumptions 
remain the same. Thus (rounded), the effective interest rate for 
Plan P is 6.53% for 2009.
    Example 2.  (i) The facts are the same as for Example 1, except 
that Plan P offers a single-sum distribution equal to the present 
value of the accrued benefit based on the applicable interest rates 
under section 417(e)(3) or an interest rate of 6.25%, whichever 
produces the higher amount. The applicable mortality table under 
section 417(e)(3) is used for both calculations.
    (ii) The present value of Participant E's age-50 single-sum 
distribution as of January 1, 2009 (when Participant E is age 46) is 
$77,392. This amount is determined by calculating the projected 
single-sum distribution at age 50 using the applicable mortality 
table under section 417(e)(3) and an interest rate of 6.25%, and 
discounting the result to January 1, 2009, using the first segment 
rate of 5.07% and male nonannuitant mortality rates for 2009. 
Because this amount is larger than the present value of Participant 
E's single-sum payment based on the applicable interest rates under 
section 417(e)(3) (that is, $68,908), the funding target for Plan P 
is $77,392 as of January 1, 2009. (See Sec.  1.430(d)-1(f)(9), 
Example 12 for additional details.)
    (iii) The effective interest rate is the single interest rate 
that will produce the same funding target if substituted for the 
segment interest rates keeping all other assumptions the same, 
including the fixed interest rate used by the plan to determine 
single-sum payments. The only segment interest rate used to develop 
the funding target of $77,392 was the first segment rate of 5.07%. 
Therefore, considering only this calculation, the single interest 
rate that would produce the same funding target would be 5.07%.
    (iv) However, the effective interest rate must also reflect the 
fact that the single-sum payment under Plan P is equal to the 
greater of the present value of Participant E's accrued benefit 
based on the fixed rate of 6.25% or the applicable interest rates 
under section 417(e)(3). If the single rate of 5.07% is substituted 
for the segment rates used to calculate the present value of the 
single-sum payment based on the applicable interest rates, the 
resulting funding target would be higher than $77,392.
    (v) Using a single interest rate of 6.0771%, the January 1, 
2009, present value of Participant E's single-sum payment based on 
the applicable interest rates is $77,392, and the present value of 
Participant E's single sum payment based on the plan's interest rate 
of 6.25% is $74,494. Plan P's funding target is the larger of the 
two, or $77,392,

[[Page 53058]]

which is the same as the funding target based on the segment 
interest rates used for the 2009 valuation. Therefore, Plan P's 
effective interest rate for 2009 (rounded) is 6.08%.

    (h) Effective/applicability dates and transition rules--(1) 
Statutory effective date/applicability date. Section 430 generally 
applies to plan years beginning on or after January 1, 2008. The 
applicability of section 430 for purposes of determining the minimum 
required contribution is delayed for certain plans in accordance with 
sections 104 through 106 of PPA'06.
    (2) Effective date/applicability date of regulations. This section 
applies to plan years beginning on or after January 1, 2010, regardless 
of whether section 430 applies to determine the minimum required 
contribution for the plan year. For plan years beginning before January 
1, 2010, plans are permitted to rely on the provisions set forth in 
this section for purposes of satisfying the requirements of section 
430.
    (3) Approval for changes in interest rate. Any change to an 
election under paragraph (e) of this section that is made for the first 
plan year beginning in 2009 or the first plan year beginning in 2010 is 
treated as having been approved by the Commissioner and does not 
require the Commissioner's specific prior approval.
    (4) Transition rule--(i) In general. Notwithstanding the general 
rules for determination of segment rates under paragraph (c)(2) of this 
section, for plan years beginning in 2008 or 2009, the first, second, 
or third segment rate for a plan with respect to any month is equal to 
the sum of--
    (A) The product of that rate for that month determined without 
regard to this paragraph (h)(4), multiplied by the applicable 
percentage; and
    (B) The product of the weighted average interest rate determined 
under the rules of paragraph (h)(4)(iii) of this section, multiplied by 
a percentage equal to 100 percent minus the applicable percentage.
    (ii) Applicable percentage. For purposes of this paragraph (h)(4), 
the applicable percentage is 33\1/3\ percent for plan years beginning 
in 2008 and 66\2/3\ percent for plan years beginning in 2009.
    (iii) Weighted average interest rate. The weighted average interest 
rate for purposes of paragraph (h)(4)(i)(B) of this section is the 
weighted average interest rate under section 412(b)(5)(B)(ii)(II) (as 
that provision was in effect for plan years beginning in 2007) as of--
    (A) The month which contains the first day of the plan year;
    (B) The month which contains the valuation date (if the applicable 
month is determined under paragraph (b)(5) of this section); or
    (C) The applicable month (if the applicable month is determined 
under paragraph (e)(2) of this section).
    (iv) New plans ineligible. The transition rule of this paragraph 
(h)(4) does not apply if the first plan year of the plan begins on or 
after January 1, 2008.

0
Par. 6. Section 1.430(i)-1 is added to read as follows:


Sec.  1.430(i)-1  Special rules for plans in at-risk status.

    (a) In general--(1) Overview. This section provides special rules 
related to determining the funding target and making other computations 
for certain defined benefit plans that are in at-risk status for the 
plan year. Section 430(i) and this section apply to single employer 
defined benefit plans (including multiple employer plans) but do not 
apply to multiemployer plans (as defined in section 414(f)). Paragraph 
(b) of this section describes rules for determining whether a plan is 
in at-risk status for a plan year, including the determination of a 
plan's funding target attainment percentage and at-risk funding target 
attainment percentage. Paragraph (c) of this section describes the 
funding target for a plan in at-risk status. Paragraph (d) of this 
section describes the target normal cost for a plan in at-risk status. 
Paragraph (e) of this section describes rules regarding how the funding 
target and the target normal cost are determined for a plan that has 
been in at-risk status for fewer than 5 consecutive plan years. 
Paragraph (f) of this section sets forth effective/applicability dates 
and transition rules.
    (2) Special rules for multiple employer plans. In the case of a 
multiple employer plan to which section 413(c)(4)(A) applies, the rules 
of section 430 and this section are applied separately for each 
employer under the plan, as if each employer maintained a separate 
plan. For example, at-risk status is determined separately for each 
employer under such a multiple employer plan. In the case of a multiple 
employer plan to which section 413(c)(4)(A) does not apply (that is, a 
plan described in section 413(c)(4)(B) that has not made the election 
for section 413(c)(4)(A) to apply), the rules of section 430 and this 
section are applied as if all participants in the plan were employed by 
a single employer.
    (b) Determination of at-risk status of a plan--(1) General rule. 
Except as otherwise provided in this section, a plan is in at-risk 
status for a plan year if--
    (i) The funding target attainment percentage for the preceding plan 
year (determined under paragraph (b)(3) of this section) is less than 
80 percent; and
    (ii) The at-risk funding target attainment percentage for the 
preceding plan year (determined under paragraph (b)(4) of this section) 
is less than 70 percent.
    (2) Small plan exception. If, on each day during the preceding plan 
year, a plan had 500 or fewer participants (including both active and 
inactive participants), determined in accordance with the same rules 
that apply for purposes of Sec.  1.430(g)-1(b)(2)(ii), then the plan is 
not treated as being in at-risk status for the plan year.
    (3) Funding target attainment percentage. For purposes of this 
section, except as otherwise provided in paragraph (b)(5) of this 
section, the funding target attainment percentage of a plan for a plan 
year is the funding target attainment percentage as defined in Sec.  
1.430(d)-1(b)(3).
    (4) At-risk funding target attainment percentage. Except as 
otherwise provided in paragraph (b)(5) of this section, the at-risk 
funding target attainment percentage of a plan for a plan year is a 
fraction (expressed as a percentage)--
    (i) The numerator of which is the value of plan assets for the plan 
year after subtraction of the prefunding balance and the funding 
standard carryover balance under section 430(f)(4)(B); and
    (ii) The denominator of which is the at-risk funding target of the 
plan for the plan year (determined under paragraph (c) of this section, 
but without regard to the loading factor imposed under paragraph 
(c)(2)(ii) of this section).
    (5) Special rules--(i) Special rule for new plans. Except as 
otherwise provided in paragraph (b)(5)(iii) of this section, in the 
case of a new plan that was neither the result of a merger nor involved 
in a spinoff, the funding target attainment percentage under paragraph 
(b)(3) of this section and the at-risk funding target attainment 
percentage under paragraph (b)(4) of this section are equal to 100 
percent for years before the plan exists.
    (ii) Special rule for plans with zero funding target. Except as 
otherwise provided in paragraph (b)(5)(iii) of this section, if the 
funding target of the plan is equal to zero for a plan year, then the 
funding target attainment percentage under paragraph (b)(3) of this 
section and the at-risk funding target attainment percentage under 
paragraph (b)(4) of this section are equal to 100 percent for that plan 
year.

[[Page 53059]]

    (iii) Exception when plan has predecessor plan that was in at-risk 
status. [Reserved]
    (iv) Special rules for plans that are the result of a merger. 
[Reserved]
    (v) Special rules for plans that are involved in a spinoff. 
[Reserved]
    (6) Special rule for determining at-risk status of plans of 
specified automobile manufacturers. See section 430(i)(4)(C) for 
special rules for determining the at-risk status of plans of specified 
automobile and automobile parts manufacturers.
    (c) Funding target for plans in at-risk status--(1) In general. If 
the plan has been in at-risk status for 5 consecutive years, including 
the current plan year, then the funding target for the plan is the at-
risk funding target determined under paragraph (c)(2) of this section. 
See paragraph (e) of this section for the determination of the funding 
target where the plan is in at-risk status for the plan year but was 
not in at-risk status for one or more of the 4 preceding plan years.
    (2) At-risk funding target--(i) Use of modified actuarial 
assumptions. Except as otherwise provided in this paragraph (c)(2), the 
at-risk funding target of the plan under this paragraph (c)(2) for the 
plan year is equal to the present value of all benefits accrued or 
earned under the plan as of the beginning of the plan year, as 
determined in accordance with Sec.  1.430(d)-1 but using the additional 
actuarial assumptions described in paragraph (c)(3) of this section.
    (ii) Funding target includes load. The at-risk funding target is 
increased by the sum of--
    (A) $700 multiplied by the number of participants in the plan 
(including active participants, inactive participants, and 
beneficiaries); plus
    (B) Four percent of the funding target (determined under Sec.  
1.430(d)-1(b)(2) as if the plan was not in at-risk status) of the plan 
for the plan year.
    (iii) Minimum amount. Notwithstanding any otherwise applicable 
provisions of this section, the at-risk funding target of a plan for a 
plan year is not less than the plan's funding target for the plan year 
determined without regard to this section.
    (3) Additional actuarial assumptions--(i) In general. The actuarial 
assumptions used to determine a plan's at-risk funding target for a 
plan year are the actuarial assumptions that are applied under section 
430, with the modifications described in this paragraph (c)(3).
    (ii) Special retirement age assumption--(A) Participants eligible 
to retire and collect benefits within 11 years. Subject to paragraph 
(c)(3)(ii)(B) of this section, if a participant would be eligible to 
commence an immediate distribution by the end of the 10th plan year 
after the current plan year (that is, the end of the 11th plan year 
beginning with the current plan year), that participant is assumed to 
commence an immediate distribution at the earliest retirement age under 
the plan, or, if later, at the end of the current plan year. The rule 
of this paragraph (c)(3)(ii)(A) does not affect the application of plan 
assumptions regarding an employee's termination of employment prior to 
the employee's earliest retirement age.
    (B) Participants otherwise assumed to retire immediately. The 
special retirement age assumption of paragraph (c)(3)(ii)(A) of this 
section does not apply to a participant to the extent the participant 
is otherwise assumed to commence benefits during the current plan year 
under the actuarial assumptions for the plan. For example, if generally 
applicable retirement assumptions would provide for a 25 percent 
probability that a participant will commence benefits during the 
current plan year, the special retirement age assumption of paragraph 
(c)(3)(ii)(A) of this section requires the plan's enrolled actuary to 
assume a 75 percent probability that the participant will commence 
benefits at the end of the plan year.
    (C) Definition of earliest retirement date. For purposes of this 
paragraph (c)(3)(ii), a plan's earliest retirement date for an employee 
is the earliest date on which the employee can commence receiving an 
immediate distribution of a fully vested benefit under the plan. See 
Sec.  1.401(a)-20, Q&A-17(b).
    (iii) Requirement to assume most valuable benefit. All participants 
and beneficiaries who are assumed to retire on a particular date are 
assumed to elect the optional form of benefit available under the plan 
that would result in the highest present value of benefits commencing 
at that date.
    (iv) Reasonable techniques permitted. The plan's actuary is 
permitted to use reasonable techniques in determining the actuarial 
assumptions that are required to be used pursuant to this paragraph 
(c)(3). For example, the plan's actuary is permitted to use reasonable 
assumptions in determining the optional form of benefit under the plan 
that would result in the highest present value of benefits for this 
purpose.
    (d) Target normal cost of plans in at-risk status--(1) General 
rule. If the plan has been in at-risk status for 5 consecutive years, 
including the current plan year, then the target normal cost for the 
plan is the at-risk target normal cost determined under paragraph 
(d)(2) of this section. See paragraph (e) of this section for the 
determination of the target normal cost where the plan is in at-risk 
status for the plan year but was not in at-risk status for one or more 
of the 4 preceding plan years.
    (2) At-risk target normal cost--(i) Use of modified actuarial 
assumptions--(A) In general. Except as otherwise provided in this 
paragraph (d)(2), the at-risk target normal cost of a plan for the plan 
year is equal to the present value (determined as of the valuation 
date) of all benefits that accrue during, are earned during, or are 
otherwise allocated to service in the plan year, as determined in 
accordance with Sec.  1.430(d)-1 but using the additional actuarial 
assumptions described in paragraph (c)(3) of this section.
    (B) Special adjustments. The target normal cost of the plan for the 
plan year (determined under paragraph (d)(2)(i)(A) of this section) is 
adjusted (not below zero) by adding the amount of plan-related expenses 
expected to be paid from plan assets during the plan year and 
subtracting the amount of any mandatory employee contributions expected 
to be made during the plan year.
    (C) Plan-related expenses. For purposes of this paragraph (d)(2), 
plan-related expenses are determined using the rules of Sec.  1.430(d)-
1(b)(1)(iii)(B).
    (ii) Loading factor. The at-risk target normal cost is increased by 
a loading factor equal to 4 percent of the present value (determined as 
of the valuation date) of all benefits under the plan that accrue, are 
earned, or are otherwise allocated to service for the plan year under 
the applicable rules of Sec.  1.430(d)-1(c)(1)(ii)(B), (C), or (D), 
determined as if the plan were not in at-risk status.
    (iii) Minimum amount. The at-risk target normal cost of a plan for 
a plan year is not less than the plan's target normal cost determined 
without regard to section 430(i) and this section.
    (e) Transition between applicable funding targets and applicable 
target normal costs--(1) Funding target. If a plan that is in at-risk 
status for the plan year has not been in at-risk status for one or more 
of the preceding 4 plan years, the plan's funding target for the plan 
year is determined as the sum of--
    (i) The funding target determined without regard to section 430(i) 
and this section; plus
    (ii) The phase-in percentage for the plan year multiplied by the 
excess of--
    (A) The at-risk funding target determined under paragraph (c)(2) of 
this section (determined taking into account paragraph (e)(4) of this 
section); over

[[Page 53060]]

    (B) The funding target determined without regard to section 430(i) 
and this section.
    (2) Target normal cost. If a plan that is in at-risk status for the 
plan year has not been in at-risk status for one or more of the 
preceding 4 plan years, the plan's target normal cost for the plan year 
is determined as the sum of--
    (i) The target normal cost determined without regard to section 
430(i) and this section; plus
    (ii) The phase-in percentage for the plan year multiplied by the 
excess of--
    (A) The at-risk target normal cost determined under paragraph 
(d)(2) of this section (determined taking into account paragraph (e)(4) 
of this section); over
    (B) The target normal cost determined without regard to section 
430(i) and this section.
    (3) Phase-in percentage. For purposes of this paragraph (e), the 
phase-in percentage is 20 percent multiplied by the number of 
consecutive plan years that the plan has been in at-risk status 
(including the current plan year) and not taking into account years 
before the first effective plan year for a plan.
    (4) Transition funding target and target normal cost determined 
without load. Notwithstanding paragraph (c)(2)(ii) of this section, if 
a plan has not been in at-risk status for 2 or more of the preceding 4 
plan years (not taking into account years before the first effective 
plan year for a plan), then the plan's at-risk funding target that is 
used for purposes of paragraph (e)(1)(ii)(A) of this section (to 
calculate the plan's funding target where the plan has been in at-risk 
status for fewer than 5 plan years) is determined without regard to the 
loading factor set forth in paragraph (c)(2)(ii) of this section. 
Similarly, if a plan has not been in at-risk status for 2 or more of 
the preceding 4 plan years (not taking into account years before the 
first effective plan year for a plan), then the plan's at-risk target 
normal cost that is used for purposes of paragraph (e)(2)(ii)(A) of 
this section (to calculate the plan's target normal cost where the plan 
has been in at-risk status for fewer than 5 plan years) is determined 
without regard to the loading factor set forth in paragraph (d)(2)(ii) 
of this section.
    (f) Effective/applicability dates and transition rules--(1) 
Statutory effective date/applicability date--(i) General rule. Section 
430 generally applies to plan years beginning on or after January 1, 
2008. The applicability of section 430 for purposes of determining the 
minimum required contribution is delayed for certain plans in 
accordance with sections 104 through 106 of the Pension Protection Act 
of 2006 (PPA '06), Public Law 109-280 (120 Stat. 780).
    (ii) Applicability of special adjustments to target normal cost. 
The special adjustments of paragraph (d)(2)(i)(B) of this section 
(relating to adjustments to the target normal cost for plan-related 
expenses and mandatory employee contributions) apply to plan years 
beginning after December 31, 2008. In addition, a plan sponsor may 
elect to make the special adjustments of paragraph (d)(2)(i)(B) of this 
section for plan years beginning in 2008. This election is made in the 
same manner and is subject to the same rules as an election to add an 
amount to the plan's prefunding balance pursuant to Sec.  1.430(f)-
1(f). Thus, the election can be made no later than the last day for 
making the minimum required contribution for the plan year to which the 
election relates.
    (2) Effective date/applicability date of regulations. This section 
applies to plan years beginning on or after January 1, 2010. For plan 
years beginning before January 1, 2010, plans are permitted to rely on 
the provisions set forth in this section for purposes of satisfying the 
requirements of section 430.
    (3) First effective plan year. For purposes of this section, the 
first effective plan year for a plan is the first plan year to which 
section 430 applies to the plan for purposes of determining the minimum 
required contribution.
    (4) Transition rule for determining at-risk status. In the case of 
plan years beginning in 2008, 2009, and 2010, paragraph (b)(1)(i) of 
this section is applied by substituting the following percentages for 
``80 percent''--
    (i) 65 percent in the case of 2008;
    (ii) 70 percent in the case of 2009; and
    (iii) 75 percent in the case of 2010.

0
Par. 7. Section 1.436-0 is added to read as follows:


Sec.  1.436-0  Table of contents.

    This section contains a listing of the major headings of Sec.  
1.436-1.


Sec.  1.436-1  Limits on benefits and benefit accruals under single 
employer defined benefit plans.

    (a) General rules.
    (1) Qualification requirement.
    (2) Organization of the regulation.
    (3) Special rules for certain plans.
    (4) Treatment of plan as of close of prohibited or cessation 
period.
    (5) Deemed election to reduce funding balances.
    (b) Limitation on shutdown benefits and other unpredictable 
contingent event benefits.
    (1) In general.
    (2) Exemption if section 436 contribution is made.
    (3) Rules of application.
    (4) Prior unpredictable contingent event.
    (c) Limitations on plan amendments increasing liability for 
benefits.
    (1) In general.
    (2) Exemption if section 436 contribution is made.
    (3) Rules of application regarding pre-existing plan provisions.
    (4) Exceptions.
    (5) Rule for determining when an amendment takes effect.
    (6) Treatment of mergers, consolidations, and transfers of plan 
assets into a plan. [Reserved]
    (d) Limitations on prohibited payments.
    (1) AFTAP less than 60 percent.
    (2) Bankruptcy.
    (3) Limited payment if AFTAP at least 60 percent but less than 
80 percent.
    (4) Exception for cessation of benefit accruals.
    (5) Right to delay commencement.
    (6) Plan alternative for special optional forms.
    (7) Exception for distributions permitted without consent of the 
participant under section 411(a)(11).
    (e) Limitation on benefit accruals for plans with severe funding 
shortfalls.
    (1) In general.
    (2) Exemption if section 436 contribution is made.
    (3) Special rule under section 203 of the Worker, Retiree, and 
Employer Recovery Act of 2008. [Reserved]
    (f) Methods to avoid or terminate benefit limitations.
    (1) In general.
    (2) Current year contributions to avoid or terminate benefit 
limitations.
    (3) Security to increase adjusted funding target attainment 
percentage.
    (4) Examples.
    (g) Rules of operation for periods prior to and after 
certification.
    (1) In general.
    (2) Periods prior to certification during which a presumption 
applies.
    (3) Periods prior to certification during which no presumption 
applies.
    (4) Modification of the presumed AFTAP.
    (5) Periods after certification of AFTAP.
    (6) Examples.
    (h) Presumed underfunding for purposes of benefit limitations.
    (1) Presumption of continued underfunding.
    (2) Presumption of underfunding beginning on first day of 4th 
month for certain underfunded plans.
    (3) Presumption of underfunding beginning on first day of 10th 
month.
    (4) Certification of AFTAP.
    (5) Examples of rules of paragraphs (h)(1), (h)(2), and (h)(3) 
of this section.
    (6) Examples of application of paragraph (h)(4) of this section.
    (i) [Reserved]
    (j) Definitions.
    (1) Adjusted funding target attainment percentage.
    (2) Annuity starting date.
    (3) First effective plan year.
    (4) Funding target.
    (5) Prior year adjusted funding target attainment percentage.

[[Page 53061]]

    (6) Prohibited payment.
    (7) Section 436 contributions.
    (8) Section 436 measurement date.
    (9) Unpredictable contingent event.
    (10) Examples.
    (k) Effective/applicability dates.
    (1) Statutory effective date.
    (2) Collectively bargained plan exception.
    (3) Effective date/applicability date of regulations.


0
Par. 8. 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 limitations on shutdown benefits and other unpredictable 
contingent event benefits. Paragraph (c) of this section describes 
limitations on plan amendments increasing liabilities. Paragraph (d) of 
this section describes limitations on prohibited payments. Paragraph 
(e) of this section describes limitations on benefit accruals. 
Paragraph (f) of this section provides rules relating to methods to 
avoid or terminate benefit limitations. Paragraph (g) of this section 
provides rules for the operation of the plan in relation to benefit 
limitations under section 436. Paragraph (h) of this section describes 
related presumptions regarding underfunding that apply for purposes of 
the benefit limitations under section 436 and requirements relating to 
certifications. Paragraph (j) of this section contains definitions. 
Paragraph (k) of this section contains effective/applicability date 
provisions.
    (3) Special rules for certain plans--(i) New plans. The limitations 
described in paragraphs (b), (c), and (e) of this section do not apply 
to a plan for the first 5 plan years of the plan. Except as otherwise 
provided by the Commissioner in guidance of general applicability, plan 
years of the plan include the following (in addition to plan years 
during which the plan was maintained by the employer or plan sponsor):
    (A) Plan years when the plan was maintained by a predecessor 
employer within the meaning of Sec.  1.415(f)-1(c)(1).
    (B) Plan years of another defined benefit plan maintained by a 
predecessor employer within the meaning of Sec.  1.415(f)-1(c)(2) 
within the preceding five years if any participants in the plan 
participated in that other defined benefit plan (even if the plan 
maintained by the employer is not the plan that was maintained by the 
predecessor employer).
    (C) Plan years of another defined benefit plan maintained by the 
employer within the preceding five years if any participants in the 
plan participated in that other defined benefit plan.
    (ii) Application of section 436 after termination of a plan--(A) In 
general. Except as otherwise provided in paragraph (a)(3)(ii)(B) of 
this section, any section 436 limitations in effect immediately before 
the termination of a plan do not cease to apply thereafter.
    (B) Exception for payments pursuant to plan termination. The 
limitations under section 436(d) and paragraph (d) of this section do 
not apply to prohibited payments (within the meaning of paragraph 
(j)(6) of this section) that are made to carry out the termination of a 
plan in accordance with applicable law. For example, a plan sponsor's 
purchase of an irrevocable commitment from an insurer to pay benefit 
liabilities in connection with the standard termination of a plan in 
accordance with section 4041(b)(3) of the Employee Retirement Income 
Security Act of 1974, as amended (ERISA), and in accordance with 29 CFR 
4041.28, does not violate section 436(d) or this section.
    (iii) Multiple employer plans. In the case of a multiple employer 
plan to which section 413(c)(4)(A) applies, this section applies 
separately with respect to each employer under the plan, as if each 
employer maintained a separate plan. Thus, the benefit limitations 
under section 436 and this section could apply differently to 
participants who are employees of different employers under such a 
multiple employer plan. In the case of a multiple employer plan to 
which section 413(c)(4)(A) does not apply (that is, a plan described in 
section 413(c)(4)(B) that has not made the election for section 
413(c)(4)(A) to apply), this section applies as if all participants in 
the plan were employed by a single employer.
    (4) Treatment of plan as of close of prohibited or cessation 
period--(i) Application to prohibited payments and accruals--(A) 
Resumption of prohibited payments. If a limitation on prohibited 
payments under paragraph (d) of this section applied to a plan as of a 
section 436 measurement date (as defined in paragraph (j)(8) of this 
section), but that limit no longer applies to the plan as of a later 
section 436 measurement date, then the limitation on prohibited 
payments under the plan does not apply to benefits with annuity 
starting dates (as defined in paragraph (j)(2) of this section) that 
are on or after that later section 436 measurement date. Any amendment 
to eliminate an optional form of benefit that contains a prohibited 
payment with respect to an annuity starting date during a period in 
which the limitations of section 436(d) and paragraph (d) of this 
section do not apply to the plan is subject to the rules of section 
411(d)(6).
    (B) Resumption of benefit accruals. If a limitation on benefit 
accruals under paragraph (e) of this section applied to a plan as of a 
section 436 measurement date, but that limit no longer applies to the 
plan as of a later section 436 measurement date, then that limitation 
does not apply to benefit accruals that are based on service on or 
after that later section 436 measurement date, except to the extent 
that the plan provides that benefit accruals will not resume when the 
limitation ceases to apply. The plan must comply with the rules 
relating to partial years of participation and the prohibition on 
double proration under Department of Labor regulation 29 CFR 2530.204-
2(c) and (d).
    (ii) Restoration of options and missed benefit accruals--(A) Option 
to amend plan. A plan is permitted to be amended to provide 
participants who had an annuity starting date within a period during 
which a limitation under paragraph (d) of this section applied to the 
plan with the opportunity to make a new election under which the form 
of benefit previously elected is modified, subject to applicable 
qualification requirements. A participant who makes such a new election 
is treated as having a new annuity starting date under sections 415 and 
417. Similarly, a plan is permitted to be amended to provide that any 
benefit accruals which were limited under the rules of paragraph (e) of 
this section are credited under the plan when the limitation no longer 
applies, subject to applicable qualification requirements. Any such 
plan amendment with respect to a new annuity starting date or crediting 
of benefit accruals is subject to the

[[Page 53062]]

requirements of section 436(c) and paragraph (c) of this section.
    (B) Automatic plan provisions. A plan is permitted to provide that 
participants who had an annuity starting date within a period during 
which a limitation under paragraph (d) of this section applied to the 
plan will be provided with the opportunity to have a new annuity 
starting date (which would constitute a new annuity starting date under 
sections 415 and 417) under which the form of benefit previously 
elected may be modified, subject to applicable qualification 
requirements, once the limitations of paragraph (d) of this section 
cease to apply. In addition, subject to the rules of paragraph (c)(3) 
of this section, a plan is permitted to provide for the automatic 
restoration of benefit accruals that had been limited under section 
436(e) as of the section 436 measurement date that the limitation 
ceases to apply.
    (iii) Shutdown and other unpredictable contingent event benefits. 
If unpredictable contingent event benefits with respect to an 
unpredictable contingent event that occurs during the plan year are not 
permitted to be paid after the occurrence of the event because of the 
limitations of section 436(b) and paragraph (b) of this section, but 
are permitted to be paid later in the plan year as a result of 
additional contributions under paragraph (f)(2) of this section or 
pursuant to the enrolled actuary's certification of the adjusted 
funding target attainment percentage for the plan year that meets the 
requirements of paragraph (g)(5)(ii)(B) of this section, then those 
unpredictable contingent event benefits must automatically become 
payable, retroactive to the period those benefits would have been 
payable under the terms of the plan (other than plan terms implementing 
the requirements of section 436(b)). If the benefits do not become 
payable during the plan year in accordance with the preceding sentence, 
then the plan is treated as if it does not provide for those benefits. 
However, all or any portion of those benefits can be restored pursuant 
to a plan amendment that meets the requirements of section 436(c) and 
paragraph (c) of this section and other applicable qualification 
requirements.
    (iv) Treatment of plan amendments that do not take effect. If a 
plan amendment does not take effect as of the effective date of the 
amendment because of the limitations of section 436(c) and paragraph 
(c) of this section, but is permitted to take effect later in the plan 
year as a result of additional contributions under paragraph (f)(2) of 
this section or pursuant to the enrolled actuary's certification of the 
adjusted funding target attainment percentage for the plan year that 
meets the requirements of paragraph (g)(5)(ii)(C) of this section, then 
the plan amendment must automatically take effect as of the first day 
of the plan year (or, if later, the original effective date of the 
amendment). If the plan amendment cannot take effect during the plan 
year, then it must be treated as if it were never adopted, unless the 
plan amendment provides otherwise.
    (v) Example. The following example illustrates the rules of this 
paragraph (a)(4):

    Example. (i) Plan T is a non-collectively bargained defined 
benefit plan with a plan year that is the calendar year and a 
valuation date of January 1. As of January 1, 2011, Plan T does not 
have a funding standard carryover balance or a prefunding balance. 
Plan T's sponsor is not in bankruptcy. Beginning January 1, 2011, 
Plan T is subject to the restriction on prohibited payments under 
paragraph (d)(3) of this section based on a presumed adjusted 
funding target attainment percentage (AFTAP) of 75%.
    (ii) U is a participant in Plan T. Participant U retires on 
February 1, 2011, and elects to receive benefits in the form of a 
single sum. Plan T may pay only a portion (generally, 50%) of the 
prohibited payment. Accordingly, U elects in accordance with 
paragraph (d)(3)(ii) of this section to receive 50% of U's benefit 
in a single sum (up to the 2011 PBGC maximum benefit guarantee 
amount described in paragraph (d)(3)(iii)(C) of this section) and 
the remainder as an immediately commencing straight life annuity.
    (iii) On March 1, 2011, the enrolled actuary for the Plan 
certifies that the AFTAP for 2011 is 80%. Accordingly, beginning 
March 1, 2011, Plan T is no longer subject to the restriction under 
paragraph (d)(3) of this section.
    (iv) Effective March 1, 2011, Plan T is amended to provide that 
a participant whose benefits were restricted under paragraph (d)(3) 
of this section with respect to an annuity starting date between 
January 1, 2011, and February 28, 2011, may elect, within a 
specified period on or after March 1, 2011, a new annuity starting 
date and receive the remainder of his or her pension benefits in an 
accelerated form of payment. Plan T's enrolled actuary determines 
that the AFTAP, taking into account the amendment, would still be 
80%. The amendment is permitted to take effect because Plan T would 
have an AFTAP of 80% taking into account the amendment and is 
therefore neither subject to the restriction on plan amendments in 
paragraph (c) of this section nor the restrictions on prohibited 
payments under paragraphs (d)(1) and (d)(3) of this section. 
Accordingly, Participant U may elect, within the specified period 
and subject to otherwise applicable qualification rules, including 
spousal consent, to receive the remainder of U's benefits in the 
form of a single sum on or after March 1, 2011.

    (5) Deemed election to reduce funding balances--(i) Limitations on 
accelerated benefit payments. If a benefit limitation under paragraph 
(d)(1) or (d)(3) of this section would (but for this paragraph (a)(5)) 
apply to a plan, the employer is treated as having made an election 
under section 430(f) to reduce the prefunding balance or funding 
standard carryover balance by such amount as is necessary for the 
adjusted funding target attainment percentage to be at the applicable 
threshold (60 or 80 percent, as the case may be) in order for the 
benefit limitation not to apply to the plan. The determination of 
whether a benefit limitation under paragraph (d) of this section would 
apply to a plan is based on whether the plan provides for an optional 
form of benefit that would be limited under section 436(d) and is not 
based on whether any participant elects payment of benefits in such a 
form.
    (ii) Other limitations for collectively bargained plans--(A) 
General rule. In the case of a collectively bargained plan to which a 
benefit limitation under paragraph (b), (c), or (e) of this section 
would (but for this paragraph (a)(5)) apply, the employer is treated as 
having made an election under section 430(f) to reduce the prefunding 
balance or funding standard carryover balance by such amount as is 
necessary for the adjusted funding target attainment percentage to be 
at the applicable threshold (60 or 80 percent, as the case may be) in 
order for the benefit limitation not to apply to the plan, taking into 
account the adjustments described in paragraph (g)(2)(iii)(A), 
(g)(3)(ii)(A), or (g)(5)(i)(B) of this section, whichever applies.
    (B) Collectively bargained plans. A plan is considered a 
collectively bargained plan for purposes of this paragraph (a)(5)(ii) 
if--
    (1) At least 50 percent of the employees benefiting under the plan 
(within the meaning of Sec.  1.410(b)-3(a)) are members of collective 
bargaining units for which the benefit levels under the plan are 
specified under a collective bargaining agreement; or
    (2) At least 25 percent of the participants in the plan are members 
of collective bargaining units for which the benefit levels under the 
plan are specified under a collective bargaining agreement.
    (iii) Exception for insufficient funding balances--(A) In general. 
Paragraphs (a)(5)(i) and (a)(5)(ii) of this section apply with respect 
to a benefit limitation for any plan year only if the application of 
those paragraphs would result in the corresponding benefit limitation 
not applying for such plan

[[Page 53063]]

year. Thus, if the plan's prefunding and funding standard carryover 
balances were reduced to zero and the resulting increase in plan assets 
taken into account would still not increase the plan's adjusted funding 
target attainment percentage enough to reach the threshold percentage 
applicable to the benefit limitation, the deemed election to reduce 
those balances pursuant to paragraph (a)(5)(i) or (a)(5)(ii) of this 
section does not apply.
    (B) Presumed adjusted funding target attainment percentage less 
than 60 percent. During any period when a plan is presumed to have an 
adjusted funding target attainment percentage of less than 60 percent 
as a result of paragraph (h)(3) of this section, the plan is treated as 
if the prefunding balance and the funding standard carryover balance 
are insufficient to increase the adjusted funding target attainment 
percentage to the threshold percentage of 60 percent. Accordingly, the 
deemed election to reduce those balances pursuant to paragraphs 
(a)(5)(i) and (a)(5)(ii) of this section does not apply to the plan.
    (iv) Other rules--(A) Date of deemed election. If an election is 
deemed to be made pursuant to this paragraph (a)(5), then the plan 
sponsor is treated as having made that election on the date as of which 
the applicable benefit limitation would otherwise apply.
    (B) Coordination with section 436 contributions. The determination 
of whether one of the benefit limitations described in paragraph 
(a)(5)(ii)(A) of this section would otherwise apply is made without 
regard to any contribution described in paragraph (f)(2) of this 
section. Thus, the requirement to reduce the prefunding balance or 
funding standard carryover balance under paragraph (a)(5)(ii) of this 
section cannot be avoided through the use of a section 436 
contribution.
    (C) Coordination with elections to offset minimum required 
contribution. See Sec.  1.430(f)-1(d)(1)(ii) for rules on the 
coordination of elections to offset the minimum required contribution 
and the deemed election to reduce the prefunding and funding standard 
carryover balances under this paragraph (a)(5).
    (v) Example. The following example illustrates the rules of this 
paragraph (a)(5):

    Example. (i) Plan W is a collectively bargained, single employer 
defined benefit plan sponsored by Sponsor X, with a plan year that 
is the calendar year and a valuation date of January 1.
    (ii) The enrolled actuary for Plan W issues a certification on 
March 1, 2010, that the 2010 AFTAP is 81%. Sponsor X adopts an 
amendment on March 25, 2010, to increase benefits under a formula 
based on participant compensation, with an effective date of May 1, 
2010. (Because the formula is based on compensation, the exception 
in paragraph (c)(4)(i) of this section does not apply.) The plan's 
enrolled actuary determines that the plan's AFTAP for 2010 would be 
75% if the benefits attributable to the plan amendment were taken 
into account in determining the funding target.
    (iii) Because the AFTAP would be below the 80% threshold if the 
benefits attributable to the plan amendment were taken into account 
in determining the funding target, Sponsor X is deemed pursuant to 
paragraph (a)(5)(ii) of this section to have made an election to 
reduce Plan W's prefunding and funding standard carryover balances 
by the amount necessary for the AFTAP to reach the 80% threshold 
(reflecting the increase in funding target attributable to the plan 
amendment), provided that the amount of those balances is sufficient 
for this purpose.
    (iv) If the deemed election described in paragraph (iii) of this 
example occurs, the plan amendment takes effect on its effective 
date (May 1, 2010). See paragraph (f) of this section for other 
methods to avoid or terminate benefit limitations (where, for 
example, the amount necessary for a benefit limitation not to apply 
for a plan year exceeds the sum of the prefunding balance and the 
funding standard carryover balance).

    (6) Notice requirements. See section 101(j) of ERISA for rules 
requiring the plan administrator of a single employer plan to provide a 
written notice to participants and beneficiaries within 30 days after 
certain specified dates, which depend on whether the plan has become 
subject to a restriction described in the ERISA provisions that are 
parallel to Internal Revenue Code sections 436(b), 436(d), and 436(e) 
(ERISA sections 206(g)(1), 206(g)(3), and 206(g)(4), respectively).
    (b) Limitation on shutdown benefits and other unpredictable 
contingent event benefits--(1) In general. Except as otherwise provided 
in this paragraph (b), a plan satisfies section 436(b) and this 
paragraph (b) only if it provides that unpredictable contingent event 
benefits with respect to any unpredictable contingent events occurring 
during a plan year will not be paid if the adjusted funding target 
attainment percentage for the plan year is--
    (i) Less than 60 percent; or
    (ii) 60 percent or more, but would be less than 60 percent if the 
adjusted funding target attainment percentage were redetermined 
applying an actuarial assumption that the likelihood of occurrence of 
the unpredictable contingent event during the plan year is 100 percent.
    (2) Exemption if section 436 contribution is made. The prohibition 
on payment of unpredictable contingent event benefits under paragraph 
(b)(1) of this section ceases to apply with respect to benefits 
attributable to an unpredictable contingent event occurring during the 
plan year upon payment by the plan sponsor of the contribution 
described in paragraph (f)(2)(iii) of this section with respect to that 
event. If the prior sentence applies with respect to an unpredictable 
contingent event, then all benefits with respect to the unpredictable 
contingent event must be paid, including benefits for periods prior to 
the contribution. See paragraph (f) of this section for additional 
rules.
    (3) Rules of application--(i) Participant-by-participant 
application. The limitations of section 436(b) and this paragraph (b) 
apply on a participant-by-participant basis. Thus, whether payment or 
commencement of an unpredictable contingent event benefit under a plan 
is restricted with respect to a participant is determined based on 
whether the participant satisfies the plan's eligibility requirements 
(other than the attainment of any age, performance of any service, 
receipt or derivation of any compensation, or the occurrence of death 
or disability) for such a benefit in a plan year in which the 
limitations of section 436(b) and this paragraph (b) apply.
    (ii) Multiple contingencies. In the case of a plan that provides 
for a benefit that depends upon the occurrence of more than one 
unpredictable contingent event with respect to a participant, the 
unpredictable contingent event for purposes of section 436(b) and this 
paragraph (b) occurs upon the last to occur of those unpredictable 
contingent events.
    (iii) Cessation of benefits. Cessation of a benefit under a plan 
upon the occurrence of a specified event is not an unpredictable 
contingent event for purposes of section 436(b) and this paragraph (b). 
Thus, section 436(b) and this paragraph (b) do not prohibit provisions 
of a plan that provide for cessation, suspension, or reduction of any 
benefits upon occurrence of any event. However, upon any subsequent 
recommencement of benefits (including any restoration of benefits), the 
rules of section 436 and this section will apply.
    (4) Prior unpredictable contingent event. Unpredictable contingent 
event benefits attributable to an unpredictable contingent event that 
occurred within a period during which no limitation under this 
paragraph (b) applied to the plan are not affected by the limitation 
described in this paragraph (b) as it applies in a subsequent period. 
For example, if a plant shutdown occurs in 2010 and the plan's funded 
status is such that benefits contingent upon that

[[Page 53064]]

plant shutdown are not subject to the limitation described in this 
paragraph (b) for that calendar plan year, this paragraph (b) does not 
apply to restrict payment of those benefits even if another plant 
shutdown occurs in 2012 that results in the restriction of benefits 
that are contingent upon that later plant shutdown under this paragraph 
(b) (where the plan's adjusted funding target attainment percentage for 
2012 would be less than 60 percent taking into account the liability 
attributable to those shutdown benefits).
    (c) Limitations on plan amendments increasing liability for 
benefits--(1) In general. Except as otherwise provided in this 
paragraph (c), a plan satisfies section 436(c) and this paragraph (c) 
only if the plan provides that no amendment to the plan that has the 
effect of increasing liabilities of the plan by reason of increases in 
benefits, establishment of new benefits, changing the rate of benefit 
accrual, or changing the rate at which benefits become nonforfeitable 
will take effect in a plan year if the adjusted funding target 
attainment percentage for the plan year is--
    (i) Less than 80 percent; or
    (ii) 80 percent or more, but would be less than 80 percent if the 
benefits attributable to the amendment were taken into account in 
determining the adjusted funding target attainment percentage.
    (2) Exemption if section 436 contribution is made--(i) General 
rule. The limitations on plan amendments in paragraph (c)(1) of this 
section cease to apply with respect to an amendment upon payment by the 
plan sponsor of the contribution described in paragraph (f)(2)(iv) of 
this section, so that the amendment is permitted to take effect as of 
the later of the first day of the plan year or the effective date of 
the amendment. See paragraph (f) of this section for additional rules.
    (ii) Amendments that do not increase funding target. If the amount 
of the contribution described in paragraph (f)(2)(iv) of this section 
is $0 (because the amendment increases benefits solely for future 
periods), the amendment is permitted to take effect without regard to 
this paragraph (c). However, see Sec.  1.430(d)-1(d)(2) for a rule that 
requires such an amendment to be taken into account in determining the 
funding target and the target normal cost in certain situations.
    (3) Rules of application regarding pre-existing plan provisions. If 
a plan contains a provision that provides for the automatic restoration 
of benefit accruals that were not permitted to accrue because of the 
application of section 436(e) and paragraph (e) of this section, the 
restoration of those accruals is generally treated as a plan amendment 
that is subject to section 436(c). However, such a provision is 
permitted to take effect without regard to the limits of section 436(c) 
and this paragraph (c) if--
    (i) The continuous period of the limitation is 12 months or less; 
and
    (ii) The plan's enrolled actuary certifies that the adjusted 
funding target attainment percentage for the plan would not be less 
than 60 percent taking into account the restored benefit accruals for 
the prior plan year.
    (4) Exceptions--(i) Benefit increases based on compensation--(A) In 
general. In accordance with section 436(c)(3), section 436(c) and this 
paragraph (c) do not apply to any amendment that provides for an 
increase in benefits under a formula that is not based on a 
participant's compensation, but only if the rate of increase in 
benefits does not exceed the contemporaneous rate of increase in 
average wages of participants covered by the amendment. The 
determination of the rate of increase in average wages is made by 
taking into consideration the net increase in average wages from the 
period of time beginning with the effective date of the most recent 
benefit increase applicable to all of those participants who are 
covered by the current amendment and ending on the effective date of 
the current amendment.
    (B) Application to participants who are not currently employed. If 
an amendment applies to both currently employed participants and other 
participants, all participants to whom the amendment applies are 
included in determining the increase in average wages of the 
participants covered by the amendment for purposes of this paragraph 
(c)(4)(i). For this purpose, participants who are not employees at any 
time during the period from the effective date of the most recent 
earlier benefit increase applicable to all of the participants who are 
covered by the current amendment and ending on the effective date of 
the current amendment are treated as having no increase or decrease in 
wages for the period after severance from employment.
    (C) Separate amendments for different plan populations. In lieu of 
a single amendment that applies to both currently employed participants 
and other participants as described in paragraph (c)(4)(i)(B) of this 
section, the employer can adopt multiple amendments--such as one that 
increases benefits for participants currently employed on the effective 
date of the current amendment and another one that increases benefits 
for other participants. In that case, the two amendments are considered 
separately in determining the increase in average wages, and the 
exception in this paragraph (c)(4)(i) applies separately to each 
amendment. Thus, the increase in benefits for currently employed 
participants takes effect if it satisfies the exception under this 
paragraph (c)(4), but the amendment increasing benefits for other 
participants who received no increase in wages from the employer during 
the period over which the increase in average wages is separately 
subject to the rules of this paragraph (c) without regard to the rules 
of this paragraph (c)(4).
    (ii) Plan provisions providing for accelerated vesting. To the 
extent that any amendment provides for (or any pre-existing plan 
provision results in) a mandatory increase in the vesting of benefits 
under the Code or ERISA (such as vesting rate increases pursuant to 
statute, plan termination amendments or partial terminations under 
section 411(d)(3), and vesting increases required by the rules for top-
heavy plans under section 416), that amendment (or pre-existing plan 
provision) does not constitute an amendment that changes the rate at 
which benefits become nonforfeitable for purposes of section 436(c) and 
this paragraph (c). However, this paragraph (c)(4)(ii) applies only to 
the extent the increase in vesting is necessary to enable the plan to 
continue to satisfy the requirements for qualified plans.
    (iii) Authority for additional exceptions. The Commissioner may, in 
guidance of general applicability, issue additional rules under which 
other amendments to a plan are not treated as amendments to which 
section 436(c) and this paragraph (c) apply. See Sec.  601.601(d)(2) 
relating to objectives and standards for publishing regulations, 
revenue rulings and revenue procedures in the Internal Revenue 
Bulletin.
    (5) Rule for determining when an amendment takes effect. For 
purposes of section 436(c) and this paragraph (c), in the case of an 
amendment that increases benefits, the amendment takes effect under a 
plan on the first date on which any individual who is or could be a 
participant or beneficiary under the plan would obtain a legal right to 
the increased benefit if the individual were on that date to satisfy 
the applicable requirements for entitlement to the benefit (such as the 
attainment of any age, performance of any service, receipt or 
derivation of any compensation, or the occurrence of death, disability, 
or severance from employment).

[[Page 53065]]

    (6) Treatment of mergers, consolidations, and transfers of plan 
assets into a plan. [Reserved]
    (d) Limitations on prohibited payments--(1) AFTAP less than 60 
percent. A plan satisfies the requirements of section 436(d)(1) and 
this paragraph (d)(1) only if the plan provides that, if the plan's 
adjusted funding target attainment percentage for a plan year is less 
than 60 percent, a participant or beneficiary is not permitted to elect 
an optional form of benefit that includes a prohibited payment, and the 
plan will not pay any prohibited payment, with an annuity starting date 
on or after the applicable section 436 measurement date.
    (2) Bankruptcy. A plan satisfies the requirements of section 
436(d)(2) and this paragraph (d)(2) only if the plan provides that a 
participant or beneficiary is not permitted to elect an optional form 
of benefit that includes a prohibited payment, and the plan will not 
pay any prohibited payment, with an annuity starting date that occurs 
during any period in which the plan sponsor is a debtor in a case under 
title 11, United States Code, or similar Federal or State law, except 
for payments made within a plan year with an annuity starting date that 
occurs on or after the date on which the enrolled actuary of the plan 
certifies that the plan's adjusted funding target attainment percentage 
for that plan year is not less than 100 percent.
    (3) Limited payment if AFTAP at least 60 percent but less than 80 
percent--(i) In general. A plan satisfies the requirements of section 
436(d)(3) and this paragraph (d)(3) only if the plan provides that, in 
any case in which the plan's adjusted funding target attainment 
percentage for a plan year is 60 percent or more but is less than 80 
percent, a participant or beneficiary is not permitted to elect the 
payment of an optional form of benefit that includes a prohibited 
payment, and the plan will not pay any prohibited payment, with an 
annuity starting date on or after the applicable section 436 
measurement date, unless the present value, determined in accordance 
with section 417(e)(3), of the portion of the benefit that is being 
paid in a prohibited payment (which portion is determined under 
paragraph (d)(3)(iii)(B) of this section) does not exceed the lesser 
of--
    (A) 50 percent of the present value (determined in accordance with 
section 417(e)(3)) of the benefit payable in the optional form of 
benefit that includes the prohibited payment; or
    (B) 100 percent of the PBGC maximum benefit guarantee amount 
described in paragraph (d)(3)(iii)(C) of this section.
    (ii) Bifurcation if optional form unavailable--(A) Requirement to 
offer bifurcation. If an optional form of benefit that is otherwise 
available under the terms of the plan is not available as of the 
annuity starting date because of the application of paragraph (d)(3)(i) 
of this section, then the plan must permit the participant or 
beneficiary to elect to--
    (1) Receive the unrestricted portion of that optional form of 
benefit (determined under the rules of paragraph (d)(3)(iii)(D) of this 
section) at that annuity starting date, determined by treating the 
unrestricted portion of the benefit as if it were the participant's or 
beneficiary's entire benefit under the plan;
    (2) Commence benefits with respect to the participant's or 
beneficiary's entire benefit under the plan in any other optional form 
of benefit available under the plan at the same annuity starting date 
that satisfies paragraph (d)(3)(i) of this section; or
    (3) Defer commencement of the payments to the extent described in 
paragraph (d)(5) of this section.
    (B) Rules relating to bifurcation. If the participant or 
beneficiary elects payment of the unrestricted portion of the benefit 
as described in paragraph (d)(3)(ii)(A)(1) of this section, then the 
plan must permit the participant or beneficiary to elect payment of the 
remainder of the participant's or beneficiary's benefits under the plan 
in any optional form of benefit at that annuity starting date otherwise 
available under the plan that would not have included a prohibited 
payment if that optional form applied to the entire benefit of the 
participant or beneficiary. The rules of Sec.  1.417(e)-1 are applied 
separately to the separate optional forms for the unrestricted portion 
of the benefit and the remainder of the benefit (the restricted 
portion).
    (C) Plan alternative that anticipates election of payment that 
includes a prohibited payment. With respect to an optional form of 
benefit that includes a prohibited payment and that is not permitted to 
be paid under paragraph (d)(3)(i) of this section, for which no 
additional information from the participant or beneficiary (such as 
information regarding a social security leveling optional form of 
benefit) is needed to make that determination, rather than wait for the 
participant or beneficiary to elect such optional form of benefit, a 
plan is permitted to provide for separate elections with respect to the 
restricted and unrestricted portions of that optional form of benefit. 
However, the rule in the preceding sentence applies only if--
    (1) The plan applies the rule to all such optional forms; and
    (2) The plan identifies the option that the bifurcation election 
replaces.
    (iii) Definitions applicable to limited payment option--(A) In 
general. The definitions in this paragraph (d)(3)(iii) apply for 
purposes of this paragraph (d)(3).
    (B) Portion of benefit being paid in a prohibited payment. If a 
benefit is being paid in an optional form for which any of the payments 
is greater than the amount payable under a straight life annuity to the 
participant or beneficiary (plus any social security supplements 
described in the last sentence of section 411(a)(9) payable to the 
participant or beneficiary) with the same annuity starting date, then 
the portion of the benefit that is being paid in a prohibited payment 
is the excess of each payment over the smallest payment during the 
participant's lifetime under the optional form of benefit (treating a 
period after the annuity starting date and during the participant's 
lifetime in which no payments are made as a payment of zero).
    (C) PBGC maximum benefit guarantee amount. The PBGC maximum benefit 
guarantee amount described in this paragraph (d)(3)(iii)(C) is the 
present value (determined under guidance prescribed by the Pension 
Benefit Guaranty Corporation, using the interest and mortality 
assumptions under section 417(e)) of the maximum benefit guarantee with 
respect to a participant (based on the participant's age or the 
beneficiary's age at the annuity starting date) under section 4022 of 
ERISA for the year in which the annuity starting date occurs.
    (D) Unrestricted portion of the benefit--(1) General rule. Except 
as otherwise provided in this paragraph (d)(3)(iii)(D), the 
unrestricted portion of the benefit with respect to any optional form 
of benefit is 50 percent of the amount payable under the optional form 
of benefit.
    (2) Special rule for forms which include social security leveling 
or a refund of employee contributions. For an optional form of benefit 
that is a prohibited payment on account of a social security leveling 
feature (as defined in Sec.  1.411(d)-3(g)(16)) or a refund of employee 
contributions feature (as defined in Sec.  1.411(d)-3(g)(11)), the 
unrestricted portion of the benefit is the optional form of benefit 
that would apply if the participant's or beneficiary's accrued benefit 
were 50 percent smaller.

[[Page 53066]]

    (3) Limited to PBGC maximum benefit guarantee amount. After the 
application of the preceding rules of this paragraph (d)(3)(iii)(D), 
the unrestricted portion of the benefit with respect to the optional 
form of benefit is reduced, to the extent necessary, so that the 
present value (determined in accordance with section 417(e)) of the 
unrestricted portion of that optional form of benefit does not exceed 
the PBGC maximum benefit guarantee amount (described in paragraph 
(d)(3)(iii)(C) of this section).
    (iv) Other rules--(A) One time application. A plan satisfies the 
requirements of this paragraph (d)(3) only if the plan provides that, 
in the case of a participant with respect to whom a prohibited payment 
(or series of prohibited payments under a single optional form of 
benefit) is made pursuant to paragraph (d)(3)(i) or (ii) of this 
section, no additional prohibited payment may be made with respect to 
that participant during any period of consecutive plan years for which 
prohibited payments are limited under this paragraph (d).
    (B) Treatment of beneficiaries. For purposes of this paragraph 
(d)(3), benefits provided with respect to a participant and any 
beneficiary of the participant (including an alternate payee, as 
defined in section 414(p)(8)) are aggregated. If the only benefits paid 
under the plan with respect to the participant are death benefits 
payable to the beneficiary, then paragraph (d)(3)(iii)(B) of this 
section is applied by substituting the lifetime of the beneficiary for 
the lifetime of the participant. If the accrued benefit of a 
participant is allocated to such an alternate payee and one or more 
other persons, then the unrestricted amount under paragraph 
(d)(3)(iii)(D) of this section is allocated among such persons in the 
same manner as the accrued benefit is allocated, unless a qualified 
domestic relations order (as defined in section 414(p)(1)(A)) with 
respect to the participant or the alternate payee provides otherwise. 
See paragraphs (j)(2)(ii) and (j)(6)(ii) of this section for other 
special rules relating to beneficiaries.
    (C) Treatment of annuity purchases and plan transfers. This 
paragraph (d)(3)(iv)(C) applies for purposes of applying paragraphs 
(d)(3)(i) and (iii)(D) of this section. In the case of a prohibited 
payment described in paragraph (j)(6)(i)(B) of this section (relating 
to purchase from an insurer), the present value of the portion of the 
benefit that is being paid in a prohibited payment is the cost to the 
plan of the irrevocable commitment and, in the case of a prohibited 
payment described in paragraph (j)(6)(i)(C) of this section (relating 
to certain plan transfers), the present value of the portion of the 
benefit that is being paid in a prohibited payment is the present value 
of the liabilities transferred (determined in accordance with section 
414(l)). In addition, the present value of the accrued benefit is 
substituted for the present value of the benefit payable in the 
optional form of benefit that includes the prohibited payment in 
paragraph (d)(3)(i)(A) of this section. (Further, see Sec.  1.411(d)-4, 
A-2(a)(3)(ii), for a rule under section 411(d)(6) that applies to an 
optional form of benefit that includes a prohibited payment described 
in paragraph (j)(6)(i)(B) of this section.)
    (v) Examples. The following examples illustrate the rules of this 
paragraph (d)(3):

    Example 1. (i) Plan A has a plan year that is the calendar year, 
and is subject to the restriction on prohibited payments under 
paragraph (d)(3) of this section for the 2010 plan year. Participant 
P is not married, and retires at age 65 during 2010, while the 
restriction under paragraph (d)(3) of this section applies to Plan 
A. P's accrued benefit is $10,000 per month, payable commencing at 
age 65 as a straight life annuity. Plan A provides for an optional 
single-sum payment (subject to the restrictions under section 436) 
equal to the present value of the participant's accrued benefit 
using actuarial assumptions under section 417(e). P's single-sum 
payment, determined without regard to this paragraph (d), is 
calculated to be $1,416,000, payable at age 65.
    (ii) The PBGC guaranteed monthly benefit for a straight life 
annuity payable at age 65 in 2010 (for purposes of this example) is 
assumed to be $4,500. The PBGC maximum benefit guarantee amount at 
age 65 is assumed to be $637,200 for 2010.
    (iii) Because Participant P retires during a period when the 
restriction in paragraph (d)(3) of this section applies to Plan A, 
only a portion of the benefit can be paid in the form of a single 
sum. P elects a single-sum payment. Because a single-sum payment is 
a prohibited payment, a determination must be made whether the 
payment can be paid under paragraph (d)(3)(i) of this section. In 
this case, because the present value of the portion of Participant 
P's benefit that is being paid in a prohibited payment exceeds the 
lesser of 50% of the benefit or the PBGC maximum benefit guarantee 
amount, it cannot be paid under paragraph (d)(3)(i) of this section. 
Accordingly, the maximum single sum that P can receive is $637,200 
(that is, the lesser of 50% of $1,416,000 or $637,200).
    (iv) Pursuant to paragraph (d)(3)(ii) of this section, Plan A 
must offer P the option to bifurcate the benefit into unrestricted 
and restricted portions. The unrestricted portion is a monthly 
straight life annuity of $4,500, which can be paid in a single sum 
of $637,200. If P elects to receive the unrestricted portion of the 
benefit in the form of a single sum, then, with respect to the 
$5,500 restricted portion, Plan A must permit P to elect any form of 
benefit that would otherwise be permitted with respect to the full 
$10,000 and that is not a prohibited payment. Alternatively, Plan A 
may provide that P is permitted to elect to defer commencement of 
the restricted portion, subject to applicable qualification rules.

    Example 2. (i) The facts are the same as in Example 1. In 
addition, Plan A provides an optional form of payment (subject to 
any benefit restrictions under section 436) that consists of a 
partial payment equal to the total return of employee contributions 
to the plan accumulated with interest, with an annuity payment for 
the remainder of the participant's benefit.
    (ii) Participant Q is not married, and retires at age 65 during 
2010, while Plan A is subject to the restriction under paragraph 
(d)(3) of this section. Participant Q has an accrued benefit equal 
to a straight life annuity of $3,000 per month. Under the optional 
form described in paragraph (i) of this Example 2, Q may elect a 
partial payment of $99,120 (representing the return of employee 
contributions accumulated with interest), plus a straight life 
annuity of $2,300 per month. The present value of Participant Q's 
accrued benefit, using actuarial assumptions under section 417(e), 
is $424,800.
    (iii) Because the present value of the portion of Q's benefit 
that is being paid in a prohibited payment ($99,120) does not exceed 
the lesser of 50% of the present value of benefits (50% of $424,800) 
or 100% of the PBGC maximum benefit guarantee amount ($637,200 at 
age 65 for 2010), the optional form described in paragraph (i) of 
this Example 2 is permitted to be paid under paragraph (d)(3)(i) of 
this section.

    Example 3. (i) The facts are the same as in Example 1. In 
addition, Plan A provides an optional form of payment under a social 
security leveling option (subject to any benefit restrictions under 
section 436) that consists of an increased temporary benefit payable 
until age 62, with reduced payments beginning at age 62. The benefit 
is structured so that the combination of the participant's pension 
benefit and Social Security benefit provides an approximately level 
income for the participant's lifetime. The PBGC maximum benefit 
guarantee amount at age 55 is assumed to be $362,776 for 2010.
    (ii) Participant R retires at age 55 in 2010 and is eligible to 
receive a level lifetime annuity of $1,200 per month beginning 
immediately. Instead, Participant R elects to receive a benefit 
under the social security leveling optional form of payment. 
Participant R's Social Security benefit payable at age 62 is 
projected, under the terms specified in Plan A, to be $1,500 per 
month. The Plan A adjustment factor for the social security leveling 
option using the minimum present value requirements of section 
417(e)(3) is .590 at age 55. Therefore, Participant R's benefit 
payable from age 55 to age 62 is $2,085 per month ($1,200 + .590 x 
$1,500), and the benefit payable for Participant's lifetime, 
beginning after age 62, is $585 per month ($2,085-$1,500).
    (iii) Because the optional form provides some payments which are 
greater than

[[Page 53067]]

payments described in paragraph (j)(6)(i)(A) of this section 
($1,200), the portion of the benefit that is being paid in a 
prohibited payment is $1,500 per month which is payable from age 55 
to age 62. Using the applicable interest and mortality rates under 
section 417(e) as in effect for Plan A at the time the benefit 
commences, the present value of a temporary benefit of $1,500 per 
month ($2,085-$585) payable from age 55 to age 62 is $106,417, and 
the present value of the entire benefit (a temporary benefit of 
$2,085 per month payable from age 55 to age 62 plus a deferred 
lifetime benefit of $585 commencing at age 62) is $207,468.
    (iv) Because $106,417 is more than 50% of $207,468 (and because 
50% of Participant R's benefit is less than $362,776, which is the 
PBGC maximum guaranteed benefit amount at age 55 for 2010), 
Participant R can only receive 50% of the benefit in the form of the 
social security leveling option. Pursuant to paragraph (d)(3)(ii) of 
this section, Plan A must offer Participant R the option to 
bifurcate the benefit into unrestricted and restricted portions. 
Participant R elects to receive the restricted portion of the early 
retirement benefit as a level lifetime annuity of $600 commencing at 
age 55.
    (v) Participant R elects to receive the unrestricted portion of 
the early retirement benefit in the social security leveling form of 
payment. This portion of the benefit is determined under the social 
security leveling form of payment as if Participant R's benefit was 
one-half of the early retirement benefit, or $600. However, using a 
monthly level lifetime benefit of $600 and a monthly social security 
benefit of $1,500, Participant R would have a negative benefit after 
age 62 ($600 + .590 x $1,500 is only $1,485; offsetting $1,500 at 
age 62 would produce a negative amount). Plan A provides that in 
this situation, the benefit under the social security leveling 
option is an actuarially equivalent monthly annuity payable until 
age 62, with zero payable thereafter. Using the actuarial 
equivalence factor of .590 at age 55, the plan administrator 
determines that the unrestricted portion of Participant R's benefit 
is $1,463 per month, payable from age 55 to age 62 ($600 + .590 x 
$1,463 = $1,463 payable until age 62; $1,463-$1,463 = zero payable 
after age 62).
    (vi) Combining the unrestricted and restricted portions of the 
benefit, Participant R will receive a total of $2,063 per month from 
age 55 to age 62 ($1,463 from the unrestricted portion of the 
benefit plus $600 from the restricted portion of the benefit), and 
$600 per month beginning at age 62 (zero from the unrestricted 
portion of the benefit plus $600 from the restricted portion of the 
benefit).

    (4) Exception for cessation of benefit accruals. This paragraph (d) 
does not apply to a plan for a plan year if the terms of the plan, as 
in effect for the period beginning on September 1, 2005, provided for 
no benefit accruals with respect to any participants. If a plan that is 
described in this paragraph (d)(4) provides for benefit accruals during 
any time on or after September 1, 2005 (treating benefit increases 
pursuant to a plan amendment as benefit accruals), this paragraph 
(d)(4) ceases to apply for the plan as of the date any benefits accrue 
under the plan (or the date the amendment takes effect). For example, 
the exception in this paragraph (d)(4) does not apply to a plan after 
the plan increases benefits to take into account increases in the 
limitations under section 415(b) on or after September 1, 2005.
    (5) Right to delay commencement. If a participant or beneficiary 
requests a distribution in an optional form of benefit that includes a 
prohibited payment that is not permitted to be paid under paragraph 
(d)(1), (d)(2), or (d)(3) of this section, the participant retains the 
right to delay commencement of benefits in accordance with the terms of 
the plan and applicable qualification requirements (such as sections 
411(a)(11) and 401(a)(9)).
    (6) Plan alternative for special optional forms. A plan is 
permitted to offer optional forms of benefit that are solely available 
during the period in which paragraph (d)(1), (d)(2), or (d)(3) of this 
section applies to limit prohibited payments under the plan. For 
example, a plan may permit participants or beneficiaries who commence 
benefits during the period in which paragraph (d)(1) of this section 
(or paragraph (d)(2) of this section) applies to limit prohibited 
payments under the plan to elect, within a specified period after the 
date on which that paragraph ceases to apply to limit prohibited 
payments under the plan, to receive the remaining benefit in the form 
of a single-sum payment equal to the present value of the remaining 
benefit, but only to the extent then permitted under this paragraph 
(d). As another example, during a period when paragraph (d)(3) of this 
section applies to a plan, the plan may permit participants and 
beneficiaries to elect payment in an optional form of benefit that 
provides for the current payment of the unrestricted portion of the 
benefit, with a delayed commencement for the restricted portion of the 
benefit (subject to other applicable qualification requirements, such 
as sections 411(a)(11) and 401(a)(9)), or may satisfy paragraph 
(d)(3)(i) of this section by permitting participants and beneficiaries 
to elect an optional form of benefit that combines an unsubsidized 
single-sum payment for over 50 percent of the accrued benefit with a 
subsidized early retirement life annuity for the remainder of the 
accrued benefit. Any such optional forms must satisfy this paragraph 
(d) and applicable qualification requirements, including satisfaction 
of section 417(e) and section 415 (at each annuity starting date).
    (7) Exception for distributions permitted without consent of the 
participant under section 411(a)(11). [Reserved]
    (e) Limitation on benefit accruals for plans with severe funding 
shortfalls--(1) In general. Except as otherwise provided in this 
paragraph (e), a plan satisfies the requirements of section 436(e) and 
this paragraph (e) only if it provides that, in any case in which the 
plan's adjusted funding target attainment percentage for a plan year is 
less than 60 percent, benefit accruals under the plan will cease as of 
the applicable section 436 measurement date. If a plan is required to 
cease benefit accruals under this paragraph (e), then the plan is not 
permitted to be amended in a manner that would increase the liabilities 
of the plan by reason of an increase in benefits or establishment of 
new benefits. The preceding sentence applies regardless of whether an 
amendment would otherwise be permissible under paragraph (c)(2) or 
(c)(3) of this section.
    (2) Exemption if section 436 contribution is made. The prohibition 
on additional benefit accruals under a plan described in paragraph 
(e)(1) of this section ceases to apply with respect to a plan year, 
effective as of the first day of the plan year, upon payment by the 
plan sponsor of the contribution described in paragraph (f)(2)(v) of 
this section. See paragraph (f) of this section for additional rules.
    (3) Special rule under section 203 of the Worker, Retiree, and 
Employer Recovery Act of 2008. [Reserved]
    (f) Methods to avoid or terminate benefit limitations--(1) In 
general. This paragraph (f) sets forth rules relating to employer 
contributions and other methods to avoid or terminate the application 
of section 436 limitations under a plan for a plan year. In general, 
there are four methods a plan sponsor may utilize to avoid or terminate 
one or more of the benefit limitations under this section for a plan 
year. Two of these methods (where the plan sponsor elects to reduce the 
prefunding balance or funding standard carryover balance and where the 
plan sponsor makes additional contributions under section 430 for the 
prior plan year within the time period provided by section 430(j)(1) 
that are not added to the prefunding balance) involve increasing the 
amount of plan assets which are taken into account in determining the 
adjusted funding target attainment percentage. The other two methods 
(making a contribution that is specifically designated as a current 
year

[[Page 53068]]

contribution to avoid or terminate application of a benefit limitation 
under paragraph (b), (c), or (e) of this section, and providing 
security under section 436(f)(1)) are described in paragraphs (f)(2) 
and (f)(3) of this section, respectively.
    (2) Current year contributions to avoid or terminate benefit 
limitations--(i) General rules--(A) Amount of contribution--(1) In 
general. This paragraph (f)(2) sets forth rules regarding contributions 
to avoid or terminate the application of section 436 limitations under 
a plan for a plan year that apply to unpredictable contingent event 
benefits, plan amendments that increase liabilities for benefits, and 
benefit accruals.
    (2) Interest adjustment. Any contribution made by a plan sponsor 
pursuant to this paragraph (f)(2) on a date other than the valuation 
date for the plan year must be adjusted with interest at the plan's 
effective interest rate under section 430(h)(2)(A) for the plan year. 
If the plan's effective interest rate for the plan year has not been 
determined at the time of the contribution, then this interest 
adjustment must be made using the highest of the three segment rates as 
applicable for the plan year under section 430(h)(2)(C). In such a 
case, if the effective interest rate for the plan year under section 
430(h)(2)(A) is subsequently determined to be less than that highest 
rate, the excess is recharacterized as an employer contribution taken 
into account under section 430 for the current plan year.
    (B) Timing requirement for section 436 contributions. Any 
contribution described in this paragraph (f)(2) must be paid before the 
unpredictable contingent event benefits are permitted to be paid, the 
plan amendment is permitted to take effect, or the benefit accruals are 
permitted to resume. In addition, any contribution described in this 
paragraph (f)(2) must be paid during the plan year.
    (C) Prefunding balance or funding standard carryover balance may 
not be used. No prefunding balance or funding standard carryover 
balance under section 430(f) may be used as a contribution described in 
this paragraph (f)(2). However, a plan sponsor is permitted to elect to 
reduce the funding standard carryover balance or the prefunding balance 
in order to increase the adjusted funding target attainment percentage 
for a plan year. See paragraph (a)(5) of this section for a rule 
mandating such a reduction in certain situations.
    (ii) Section 436 contributions separate from minimum required 
contributions--(A) In general. The contributions described in this 
paragraph (f)(2) are contributions described in sections 436(b)(2), 
436(c)(2), and 436(e)(2), and are separate from any minimum required 
contributions under section 430. Thus, if a plan sponsor makes a 
contribution described in this paragraph (f)(2) for a plan year but 
does not make the minimum required contribution for the plan year, the 
plan fails to satisfy the minimum funding requirements under section 
430 for the plan year. In addition, a contribution described in this 
paragraph (f)(2) is disregarded in determining the maximum addition to 
the prefunding balance under section 430(f)(6) and Sec.  1.430(f)-
1(b)(1)(ii).
    (B) Designation requirement. Any contribution made by a plan 
sponsor pursuant to this paragraph (f)(2) must be designated as such at 
the time the contribution is used to avoid or terminate the limitations 
under this paragraph (f)(2), including designation of the benefits or 
amendments to which the limits do not apply because of the 
contribution. Except as specifically provided in paragraph 
(f)(2)(i)(A)(2), (g) or (h) of this section, such a contribution cannot 
be subsequently recharacterized with respect to any plan year as a 
contribution to satisfy a minimum required contribution obligation, or 
otherwise. The designation must be made in accordance with the rules 
and procedures that otherwise apply to elections under Sec.  1.430(f)-
1(f) with respect to the prefunding and funding standard carryover 
balances.
    (C) Requirement to recertify AFTAP. If the plan's enrolled actuary 
has already certified the adjusted funding target attainment percentage 
for the plan year, a plan sponsor is treated as making the contribution 
described in paragraph (f)(2)(iii)(B), (f)(2)(iv)(B), or (f)(2)(v) of 
this section for the plan year only after the plan's enrolled actuary 
certifies an updated adjusted funding target attainment percentage for 
the plan year that takes into account the increased liability for the 
unpredictable contingent event benefits, the plan amendments, or 
restored accruals, and the associated section 436 contribution, under 
the rules of paragraph (h)(4)(v) of this section. See also paragraph 
(g)(4)(i) of this section for a requirement to modify the presumed 
adjusted funding target attainment percentage to take the liability for 
the unpredictable contingent event benefits or plan amendments, and the 
associated section 436 contribution, into account (if the contribution 
described in paragraph (f)(2)(iii)(B), (f)(2)(iv)(B), or (f)(2)(v) of 
this section is made before the plan's enrolled actuary certifies the 
adjusted funding target attainment percentage for the plan year).
    (iii) Contribution for unpredictable contingent event benefits. In 
the case of a contribution to avoid or terminate the application of the 
limitation on benefits attributable to an unpredictable contingent 
event under section 436(b)--
    (A) In the event that the adjusted funding target attainment 
percentage for the plan year determined without taking into account the 
liability attributable to the unpredictable contingent event benefits 
is less than 60 percent, the amount of the contribution under section 
436(b)(2) is equal to the amount of the increase in the funding target 
of the plan for the plan year if the benefits attributable to the 
unpredictable contingent event were included in the determination of 
the funding target.
    (B) In the event that the adjusted funding target attainment 
percentage for the plan year determined without taking into account the 
liability attributable to the unpredictable contingent event benefits 
is 60 percent or more, the amount of the contribution under section 
436(b)(2) is the amount that would be sufficient to result in an 
adjusted funding target attainment percentage for the plan year of 60 
percent if the contribution (and any prior section 436 contributions 
made for the plan year) were included as part of the plan assets and 
the funding target were to take into account the adjustments described 
in paragraph (g)(2)(iii)(A), (g)(3)(ii)(A), or (g)(5)(i)(B) of this 
section, whichever applies.
    (iv) Contribution for plan amendments increasing liability for 
benefits. In the case of a contribution to avoid or terminate the 
application of the limitation on benefits attributable to a plan 
amendment under section 436(c)--
    (A) In the event that the adjusted funding target attainment 
percentage for the plan year determined without taking into account the 
liability attributable to the plan amendment is less than 80 percent, 
the amount of the contribution under section 436(c)(2) is equal to the 
amount of the increase in the funding target of the plan for the plan 
year if the liabilities attributable to the amendment were included in 
the determination of the funding target.
    (B) In the event that the adjusted funding target attainment 
percentage for the plan year determined without taking into account the 
liability attributable to the plan amendment is 80 percent or more, the 
amount of the contribution under section 436(c)(2) is the amount that 
would be sufficient to result in an adjusted funding target attainment 
percentage for the plan year of 80

[[Page 53069]]

percent if the contribution (and any prior section 436 contributions 
made for the plan year) were included as part of the plan assets and 
the funding target were to take into account the adjustments described 
in paragraph (g)(2)(iii)(A), (g)(3)(ii)(A), or (g)(5)(i)(B) of this 
section, whichever applies.
    (v) Contribution required for continued benefit accruals. In the 
case of a contribution to avoid or terminate the application of the 
limitation on accruals under section 436(e), the amount of the 
contribution under section 436(e)(2) is equal to the amount sufficient 
to result in an adjusted funding target attainment percentage for the 
plan year of 60 percent if the contribution (and any prior section 436 
contributions made for the plan year) were included as part of the plan 
assets and the funding target were to take into account the adjustments 
described in paragraph (g)(2)(iii)(A) or (g)(5)(i)(B) of this section, 
whichever applies.
    (3) Security to increase adjusted funding target attainment 
percentage--(i) In general. For purposes of avoiding benefit 
limitations under section 436, a plan sponsor may provide security in 
the form described in paragraph (f)(3)(ii) of this section. In such a 
case, the adjusted funding target attainment percentage for the plan 
year is determined by treating as an asset of the plan any security 
provided by a plan sponsor by the valuation date for the plan year in a 
form meeting the requirements of paragraph (f)(3)(ii) of this section. 
However, this security is not taken into account as a plan asset for 
any other purpose, including section 430.
    (ii) Form of security. The forms of security permitted under 
paragraph (f)(3)(i) of this section are limited to--
    (A) A bond issued by a corporate surety company that is an 
acceptable surety for purposes of section 412 of ERISA; or
    (B) Cash, or United States obligations which mature in 3 years or 
less, held in escrow by a bank or an insurance company.
    (iii) Enforcement. Any form of security provided under paragraph 
(f)(3)(i) of this section must provide--
    (A) That it will be paid to the plan upon the earliest of--
    (1) The plan termination date as defined in section 4048 of ERISA;
    (2) If there is a failure to make a payment of the minimum required 
contribution for any plan year beginning after the security is 
provided, the due date for the payment under section 430(j)(1) or 
430(j)(3); or
    (3) If the plan's adjusted funding target attainment percentage is 
less than 60 percent (without regard to any security provided under 
this paragraph (f)(3)) for a consecutive period of 7 plan years, the 
valuation date for the last plan year in the 7-year period; and
    (B) That the plan administrator must notify the surety, bank, or 
insurance company that issued or holds the security of any event 
described in paragraph (f)(3)(iii)(A) of this section within 10 days of 
its occurrence.
    (iv) Release of security. The form of security is permitted to 
provide that it will be released (and any amounts thereunder will be 
refunded to the plan sponsor together with any interest accrued 
thereon) as provided in the agreement governing the security, but such 
release is not permitted until the plan's enrolled actuary has 
certified that the plan's adjusted funding target attainment percentage 
for a plan year is at least 90 percent (without regard to any security 
provided under this paragraph (f)(3)) or until replacement security has 
been provided in accordance with paragraph (f)(3)(vi) of this section.
    (v) Contribution of security to plan. Any security provided under 
this paragraph (f)(3) that is subsequently turned over to the plan 
(whether pursuant to the enforcement mechanism of paragraph (f)(3)(iii) 
of this section or after its release under paragraph (f)(3)(iv) of this 
section) is treated as a contribution by the plan sponsor taken into 
account under section 430 when contributed and, if turned over pursuant 
to paragraph (f)(3)(iii) of this section, is not a contribution under 
paragraph (f)(2) of this section.
    (vi) Replacement security. If security has been provided to a plan 
pursuant to this paragraph (f)(3), the plan sponsor may provide new 
security to the plan and subsequently or simultaneously have the 
original security released, but only if--
    (A) The new security is in a form that satisfies the requirements 
of paragraph (f)(3)(ii) of this section;
    (B) The amount of the new security is no less than the amount of 
the original security, determined at the time the original security is 
released; and
    (C) The period described in paragraph (f)(3)(iii)(A)(3) of this 
section with respect to the new security is the same as the period that 
applied under that paragraph to the original security.
    (4) Examples. The following examples illustrate the rules of this 
paragraph (f):

    Example 1. (i) Plan Z is a non-collectively bargained defined 
benefit plan with a plan year that is the calendar year and a 
valuation date of January 1. Plan Z's sponsor is not in bankruptcy, 
and Plan Z did not purchase any annuities in 2009 or 2010. As of 
January 1, 2011, Plan Z does not have a funding standard carryover 
balance or a prefunding balance, and is not in at-risk status. As of 
that date, Plan Z has plan assets (and adjusted plan assets) of 
$2,000,000 and a funding target (and an adjusted funding target) of 
$2,550,000. On March 1, 2011, the enrolled actuary for the plan 
certifies that the AFTAP as of January 1, 2011, is 78.43%. The 
effective interest rate for Plan Z for the 2011 plan year is 5.5%.
    (ii) On May 1, 2011, the plan sponsor amends Plan Z to increase 
benefits. The enrolled actuary for the plan determines that the 
present value, as of January 1, 2011, of the increase in the funding 
target due to the amendment is $400,000. Because the AFTAP prior to 
the plan amendment is less than 80%, Plan Z is subject to the 
restriction on plan amendments in paragraph (c) of this section, and 
the amendment cannot take effect unless the employer utilizes one of 
the methods described in paragraph (f) of this section to avoid 
benefit limitations.
    (iii) In order for the amendment to be permitted to take effect, 
the plan sponsor makes a contribution described in paragraph (f)(2) 
of this section. Because the AFTAP prior to the amendment was less 
than 80%, the provisions of paragraph (f)(2)(iv)(A) of this section 
apply. The amount of the contribution as of January 1, 2011, needed 
to avoid the restriction on plan amendments under paragraph (c) of 
this section is equal to the amount of the increase in funding 
target attributable to the amendment, or $400,000. Under the 
provisions of paragraph (f)(2)(iv)(A) of this section, this 
contribution is required even though, if the contribution were 
included as part of the plan assets and the liabilities attributable 
to the plan amendment were included in the funding target, the AFTAP 
would be 81.36% (that is, adjusted plan assets of $2,000,000 plus 
the contribution of $400,000 as of January 1, 2011; divided by the 
adjusted funding target of $2,550,000 increased to reflect the 
additional $400,000 in the funding target attributable to the plan 
amendment).
    (iv) However, because the contribution is not paid until May 1, 
2011, the necessary contribution amount must be adjusted to reflect 
interest from the valuation date to the date of the contribution, at 
Plan Z's effective interest rate for the 2011 plan year. The amount 
of the required contribution after adjustment is $407,203, 
determined as $400,000 increased for 4 months of compound interest 
at an effective annual interest rate of 5.5%.
    (v) A contribution of $407,203 is made on May 1, 2011, and is 
designated as a contribution under paragraph (f)(2) of this section 
with respect to the May 1, 2011, plan amendment. Accordingly, the 
contribution is not applied toward minimum funding requirements 
under section 430, and is not eligible for inclusion in the 
prefunding balance under Sec.  1.430(f)-1(b)(1). Since this 
contribution meets the requirements of paragraph (f)(2) of this 
section, the plan amendment takes effect in accordance with its 
terms.
    Example 2. (i) The facts are the same as in Example 1, except 
that the plan is in at-risk status under section 430(i). The funding

[[Page 53070]]

target determined under section 430(i) is $2,600,000, and the 
funding target determined without regard to section 430(i) is 
$2,550,000.
    (ii) On May 1, 2011, the plan sponsor amends Plan Z to increase 
benefits. The plan's enrolled actuary determines that the present 
value as of January 1, 2011 of the increase in the funding target 
due to the amendment (taking into account the at-risk status of the 
plan) is $440,000. Because the AFTAP prior to the plan amendment is 
78.43% (determined taking into account the at-risk status of Plan 
Z), Plan Z is subject to the restriction on plan amendments in 
paragraph (c) of this section, and the amendment cannot take effect 
unless the employer utilizes one of the methods described in this 
paragraph (f) to avoid benefit limitations.
    (iii) In order for this amendment to be permitted to take 
effect, the plan sponsor makes a contribution described in paragraph 
(f)(2) of this section. Because the AFTAP prior to the amendment was 
less than 80%, the provisions of paragraph (f)(2)(iv)(A) of this 
section apply. The amount of the contribution as of January 1, 2011, 
needed to avoid the restriction on plan amendments under paragraph 
(c) of this section is equal to the amount of the increase in 
funding target attributable to the amendment, or $440,000. Under the 
provisions of paragraph (f)(2)(iv)(A) of this section, this 
contribution is required even though, if the contribution were 
included as part of the plan assets and the liability attributable 
to the plan amendment were included in the funding target, the AFTAP 
would exceed 80%.
    (iv) However, because the contribution is not paid until May 1, 
2011, the necessary contribution amount must be adjusted to reflect 
interest from the valuation date to the date of the contribution, at 
Plan Z's effective interest rate for the 2011 plan year. The amount 
of the required contribution after adjustment is $447,923, 
determined as $440,000 increased for 4 months of compound interest 
at an effective annual interest rate of 5.5%.
    (v) A contribution of $447,923 is made on May 1, 2011, and is 
designated as a contribution under paragraph (f)(2) of this section 
with respect to the May 1, 2011, plan amendment. Accordingly, the 
contribution is not applied toward minimum funding requirements 
under section 430, and is not eligible for inclusion in the 
prefunding balance under Sec.  1.430(f)-1(b)(1). Since this 
contribution meets the requirements of paragraph (f)(2) of this 
section, the plan amendment takes effect in accordance with its 
terms.
    Example 3. (i) The facts are the same as in Example 1, except 
that the enrolled actuary for the plan does not issue the 
certification of the 2011 AFTAP until September 1, 2011. Prior to 
October 1, 2010, the enrolled actuary had certified the 2010 AFTAP 
to be 82%. Other than this amendment, no other amendment or 
unpredictable contingent event has occurred that requires a 
recertification. As of May 1, 2011, the plan's effective interest 
rate for the 2011 plan year has not yet been determined. The highest 
of the three segment rates applicable to the 2011 plan year under 
section 430(h)(2)(C) is 6%.
    (ii) Because the enrolled actuary has not certified the actual 
AFTAP as of January 1, 2011, and the amendment is scheduled to take 
effect after April 1, 2011, the rules of paragraph (h)(2)(iii) of 
this section apply. Accordingly, the AFTAP for 2011 (prior to 
reflecting the effect of the amendment) is presumed to be 10 
percentage points lower than the 2010 AFTAP, or 72%. Because this 
presumed AFTAP is less than 80%, the restriction on plan amendments 
in paragraph (c) of this section applies, and the plan amendment 
cannot take effect.
    (iii) In order to allow the plan amendment to take effect, the 
plan sponsor decides to make a contribution under paragraph (f)(2) 
of this section on May 1, 2011. Because the presumed AFTAP was less 
than 80% prior to reflecting the plan amendment, the rules of 
paragraph (f)(2)(iv)(A) of this section apply, and the amount of the 
contribution under section 436(c)(2) is the amount of the increase 
in the funding target for the year if the plan amendment were 
included in the determination of the funding target. Accordingly, an 
additional contribution of $400,000 is required as of January 1, 
2011, to avoid the restriction on plan amendments under paragraph 
(c) of this section.
    (iv) However, since the contribution is not made until May 1, 
2011, the amount of the required contribution must be adjusted to 
reflect interest from the valuation date to the date of the 
contribution. Since the effective interest rate has not yet been 
determined, the interest adjustment is based on the highest of the 
three segment rates applicable for the 2011 plan year under section 
430(h)(2)(C), or 6%. The amount of the required contribution after 
adjustment is $407,845, determined as $400,000 increased for 4 
months of compound interest at the highest segment interest rate for 
2011, or 6%.
    (v) A contribution of $407,845 is made on May 1, 2011, and is 
designated as a contribution under paragraph (f)(2) of this section 
with respect to the May 1, 2011, plan amendment. Accordingly, the 
contribution is not applied toward minimum funding requirements 
under section 430, and is not eligible for inclusion in the 
prefunding balance under Sec.  1.430(f)-1(b)(1). Since this 
contribution meets the requirements of paragraph (f)(2) of this 
section, the plan amendment takes effect in accordance with its 
terms.
    (vi) After the plan's effective interest rate for 2011 has been 
determined to be 5.5%, the amount of excess interest previously 
contributed is recharacterized as an employer contribution taken 
into account under section 430 for 2011 (because that rate for the 
year is less than 6%).

    (g) Rules of operation for periods prior to and after 
certification--(1) In general. Section 436(h) and paragraph (h) of this 
section set forth a series of presumptions that apply before the 
enrolled actuary for a plan issues a certification of the plan's 
adjusted funding target attainment percentage for the plan year. This 
paragraph (g) sets forth rules for the application of limitations under 
sections 436(b), 436(c), 436(d), and 436(e) prior to and during the 
period those presumptions apply to the plan, and describes the 
interaction of those presumptions with plan operations after the plan's 
enrolled actuary has issued a certification of the plan's adjusted 
funding target attainment percentage for the plan year. Paragraph 
(g)(2) of this section sets forth rules that apply to periods during 
which a presumption under section 436(h) and paragraph (h) of this 
section applies. Paragraph (g)(3) of this section sets forth rules that 
apply to periods during which no presumptions under section 436(h) and 
paragraph (h) of this section apply but which are prior to the enrolled 
actuary's certification of the plan's adjusted funding target 
attainment percentage for the plan year. Paragraph (g)(4) of this 
section sets forth rules for modifying the plan's presumed adjusted 
funding target attainment percentage in certain situations. Paragraph 
(g)(5) of this section sets forth rules that apply after the enrolled 
actuary's certification of the plan's adjusted funding target 
attainment percentage for a plan year. Paragraph (g)(6) of this section 
sets forth examples illustrating the rules in this paragraph (g).
    (2) Periods prior to certification during which a presumption 
applies--(i) Plan must follow presumptions. A plan must provide that, 
for any period during which a presumption under section 436(h) and 
paragraph (h)(1), (2), or (3) of this section applies to the plan, the 
limitations applicable under section 436 and paragraphs (b), (c), (d), 
and (e) of this section are applied to the plan as if the adjusted 
funding target attainment percentage for the year were the presumed 
adjusted funding target attainment percentage determined under the 
rules of section 436(h) and paragraph (h)(1), (2), or (3) of this 
section, as applicable, updated to take into account certain 
unpredictable contingent event benefits and plan amendments in 
accordance with section 436 and the rules of this paragraph (g).
    (ii) Determination of amount of reduction in balances--(A) In 
general. During the period described in this paragraph (g)(2), the 
rules of paragraph (a)(5) of this section (relating to the deemed 
election to reduce the funding standard carryover balance and the 
prefunding balance) must be applied based on the presumed adjusted 
funding target attainment percentage. This paragraph (g)(2)(ii) 
provides rules for the determination of the reduction that applies as 
of the first day of the plan year, and, in certain circumstances, that 
applies later in the plan year. Paragraph (g)(2)(iii) of this section 
provides additional rules that apply with respect to unpredictable 
contingent event

[[Page 53071]]

benefits or plan amendments, which rules must be applied prior to the 
application of paragraph (g)(2)(iv) of this section relating to section 
436 contributions. The reapplication of the rules under this paragraph 
(g)(2) regarding the deemed election in paragraph (a)(5) of this 
section may require an additional reduction in the prefunding and 
funding standard carryover balances if the amount of the reduction in 
those balances that is necessary to reach the applicable threshold to 
avoid the application of a section 436 limitation exceeds the amount 
that was initially reduced. Prior reductions of the prefunding and 
funding standard carryover balances continue to apply.
    (B) Reduction in balances at the first day of plan year--(1) Plans 
with a certified AFTAP for the prior plan year. If section 436(h)(1) 
and paragraph (h)(1) of this section apply to determine the presumed 
adjusted funding target attainment percentage as of the first day of 
the current plan year based on the plan's enrolled actuary 
certification of the adjusted funding target attainment percentage for 
the prior plan year made during that prior plan year, then, in order to 
determine the amount of the reduction (if any) in the funding standard 
carryover balance and prefunding balance under this paragraph 
(g)(2)(ii), a presumed adjusted funding target must be established as 
of the first day of the plan year, and that amount is then compared to 
the interim value of adjusted plan assets as of that date. For this 
purpose, the interim value of adjusted plan assets is equal to the 
value of adjusted plan assets (within the meaning of paragraph 
(j)(1)(ii) of this section) as of the first day of the plan year, 
determined without regard to future contributions and future elections 
with respect to the plan's prefunding and funding standard carryover 
balances under section 430(f) (for example, elections to add to the 
prefunding balance for the prior plan year, elections to use the 
prefunding and funding standard carryover balances to offset the 
minimum required contribution for a year, and elections (including 
deemed elections under paragraph (a)(5) of this section) to reduce the 
prefunding and funding standard carryover balances for the current plan 
year), and the presumed adjusted funding target is equal to the interim 
value of adjusted plan assets for the plan year divided by the presumed 
adjusted funding target attainment percentage. As provided in Sec.  
1.430(f)-1(e)(1), the rules of Sec.  1.430(f)-1(d)(1)(ii) apply for 
purposes of determining the amount of the prefunding balance or the 
funding standard carryover balance that is available for reduction.
    (2) Plans with presumed AFTAP deemed under 60 percent. If paragraph 
(g)(2)(ii)(B)(1) of this section does not apply to the plan for a plan 
year and the last day of the plan year is on or after the first day of 
the 10th month of the plan year, such that the presumed adjusted 
funding target attainment percentage for the prior plan year is 
conclusively presumed to be less than 60 percent under section 
436(h)(2) and paragraph (h)(3) of this section, then no reduction in 
the funding standard carryover balance and prefunding balance is 
required under this paragraph (g)(2)(ii)(B). However, see paragraph 
(g)(2)(iv)(A) of this section for rules for determining the amount of a 
section 436 contribution that would permit unpredictable contingent 
event benefits to be paid in such a case.
    (3) Treatment of short plan years. If paragraph (g)(2)(ii)(B)(1) of 
this section does not apply to the plan for a plan year but the last 
day of the plan year is before the first day of the 10th month of the 
plan year, such that section 436(h)(2) and paragraph (h)(3) of this 
section did not apply for that plan year, then paragraph 
(g)(2)(ii)(B)(1) of this section must be applied as of the first day of 
the next plan year based on the presumed adjusted funding target 
attainment percentage as of that last day of the prior short plan year.
    (C) Change in presumed AFTAP later in the plan year. If the 
presumed adjusted funding target attainment percentage for the plan 
year changes during the year, the rules regarding the deemed election 
to reduce the prefunding and funding standard carryover balances 
described in paragraph (a)(5) of this section must be reapplied based 
on the new presumed adjusted funding target attainment percentage. This 
will typically occur on the first day of the 4th month of a plan year, 
but could happen at a different date if the enrolled actuary certifies 
the adjusted funding target attainment percentage for the prior plan 
year during the current plan year. In order to determine the amount of 
any reduction in the prefunding and funding standard carryover balances 
that would apply in such a situation, a new presumed adjusted funding 
target must be established, which is then compared to the updated 
interim value of adjusted plan assets. For this purpose, the updated 
interim value of adjusted plan assets for the plan year is determined 
as the interim value of adjusted plan assets as of the first day of the 
plan year updated to take into account contributions for the prior plan 
year and section 430(f) elections with respect to the plan's prefunding 
and funding standard carryover balances made before the date of the 
change in the presumed adjusted funding target attainment percentage, 
and the new presumed adjusted funding target is equal to the updated 
interim value of adjusted plan assets divided by the new presumed 
adjusted funding target attainment percentage.
    (D) Plans funded below the threshold. If, after application of 
paragraph (g)(2)(ii)(B) and (C) of this section, the presumed adjusted 
funding target attainment percentage under this paragraph (g)(2)(ii) is 
less than the 60 percent threshold under section 436(e), then no 
benefit accruals are permitted under the plan unless the plan sponsor 
makes a section 436 contribution as provided in paragraph (g)(2)(iv)(A) 
of this section. See paragraph (g)(5)(ii) of this section for rules 
that apply on and after the date the enrolled actuary for the plan 
issues a certification of the adjusted funding target attainment 
percentage of the plan for the current plan year.
    (iii) Calculation of inclusive presumed AFTAP for application to 
unpredictable contingent event benefits and plan amendments--(A) 
Requirement to calculate inclusive presumed AFTAP. For purposes of 
applying the limitations under paragraphs (b) and (c) of this section 
during the period described in this paragraph (g)(2), an inclusive 
presumed adjusted funding target attainment percentage must be 
calculated. The inclusive presumed adjusted funding target attainment 
percentage is the ratio (expressed as a percentage) of the interim 
value of adjusted plan assets (updated to take into account 
contributions for the prior plan year, any prior section 436 
contributions made for the plan year to the extent not previously taken 
into account in the interim value of adjusted plan assets for the plan 
year, and section 430(f) elections with respect to the plan's 
prefunding and funding standard carryover balances made before the date 
of the unpredictable contingent event or the date the plan amendment 
would take effect) to the inclusive presumed adjusted funding target. 
The inclusive presumed adjusted funding target is calculated as the 
presumed adjusted funding target determined under paragraph 
(g)(2)(ii)(B) or (C) of this section, increased to take into account--
    (1) The unpredictable contingent event benefits or plan amendment;
    (2) Any unpredictable contingent event benefits that are permitted 
to be paid as a result of any unpredictable

[[Page 53072]]

contingent event that occurred, or plan amendment that has taken 
effect, in the prior plan year to the extent not taken into account in 
the prior plan year adjusted funding target attainment percentage; and
    (3) Any other unpredictable contingent event benefits that are 
permitted to be paid as a result of any unpredictable contingent event 
that occurred, or plan amendment that has taken effect, in the current 
plan year to the extent not previously taken into account in the 
presumed adjusted funding target for the plan year.
    (B) Mandatory reduction for collectively bargained plans. During 
the period described in this paragraph (g)(2), the rules of paragraph 
(a)(5)(ii) of this section (relating to the deemed election to reduce 
the funding standard carryover balance and the prefunding balance) must 
be applied by treating the inclusive presumed adjusted funding target 
attainment percentage determined under this paragraph (g)(2)(iii) as if 
it were the adjusted funding target attainment percentage.
    (C) Optional reduction for plans that are not collectively 
bargained plans. A plan sponsor of a plan that is not a collectively 
bargained plan (and, thus, is not required to reduce the funding 
standard carryover balance and the prefunding balance under the rules 
of paragraph (a)(5)(ii) of this section) is permitted to elect to 
reduce those balances in order to increase the updated interim value of 
adjusted plan assets that is used to determine the inclusive presumed 
adjusted funding target attainment percentage under this paragraph 
(g)(2)(iii).
    (D) Plans funded below the threshold. If, after application of 
paragraph (g)(2)(iii)(B) and (C) of this section, the inclusive 
presumed adjusted funding target attainment percentage determined under 
this paragraph (g)(2)(iii) is less than the applicable threshold under 
section 436(b) or 436(c), then the plan is not permitted to provide any 
benefits attributable to the unpredictable contingent event, nor is the 
plan amendment permitted to take effect, unless the plan sponsor makes 
a section 436 contribution as provided in paragraph (g)(2)(iv) of this 
section. See paragraph (g)(5)(ii) of this section for rules that apply 
on and after the date the enrolled actuary for the plan issues a 
certification of the adjusted funding target attainment percentage of 
the plan for the current plan year.
    (E) Plans funded at or above the threshold. If, after application 
of paragraph (g)(2)(iii)(B) or (C) of this section, the inclusive 
presumed adjusted funding target attainment percentage is greater than 
or equal to the applicable threshold under section 436(b) or 436(c), 
then the plan is not permitted to limit the payment of unpredictable 
contingent event benefits described in paragraph (b) of this section, 
nor is the plan permitted to restrict a plan amendment increasing 
benefit liabilities described in paragraph (c) of this section from 
taking effect, based on an expectation that the limitations under 
paragraph (b) or (c) of this section will apply following the enrolled 
actuary's certification of the adjusted funding target attainment 
percentage for the plan year.
    (iv) Section 436 contributions--(A) Plans with presumed AFTAP below 
60 percent--(1) Unpredictable contingent event benefits. If the 
presumed adjusted funding target attainment percentage for a plan is 
less than 60 percent, then unpredictable contingent event benefits are 
permitted to be paid as a result of an unpredictable contingent event 
occurring during the period described in this paragraph (g)(2) if the 
plan sponsor makes the section 436 contribution described in paragraph 
(f)(2)(iii)(A) of this section.
    (2) Plan amendments. If the presumed adjusted funding target 
attainment percentage for a plan is less than 60 percent, then no plan 
amendment increasing plan liabilities is permitted to take effect 
during the period described in this paragraph (g)(2). See paragraph 
(e)(1) of this section.
    (3) Benefit accruals. If the presumed adjusted funding target 
attainment percentage for a plan year of less than 60 percent is 
determined based on the plan's enrolled actuary certification of the 
adjusted funding target attainment percentage for the prior plan year 
made during that prior plan year (as opposed to being presumed to be 
less than 60 percent under the rules of section 436(h)(2) and paragraph 
(h)(3) of this section because the actuary has not certified the 
adjusted funding target attainment percentage for the prior plan year 
before the first day of the 10th month of the prior plan year), then 
benefits are permitted to accrue if the plan sponsor makes a section 
436 contribution in the amount necessary to bring the ratio of the 
updated interim value of adjusted plan assets to the presumed adjusted 
funding target up to 60 percent, as described in paragraph (f)(2)(v) of 
this section.
    (B) Plan amendments for plans with presumed AFTAP below 80 percent. 
If the presumed adjusted funding target attainment percentage for a 
plan is less than 80 percent, but is not less than 60 percent, then a 
plan amendment increasing plan liabilities is permitted to take effect 
during the period described in this paragraph (g)(2) if the plan 
sponsor makes a section 436 contribution described in paragraph 
(f)(2)(iv)(A) of this section.
    (C) Contributions required to reach threshold. If a plan is 
described in paragraph (g)(2)(iii)(D) of this section and neither 
paragraph (g)(2)(iv)(A) nor (B) of this section apply to the plan, then 
unpredictable contingent event benefits are permitted to be paid or the 
plan amendment is permitted to become effective during the period this 
paragraph (g)(2) applies to the plan only if the plan sponsor makes a 
section 436 contribution in the amount necessary to bring the ratio of 
the updated interim value of adjusted plan assets to the inclusive 
presumed adjusted funding target up to the applicable threshold under 
section 436(b) or (c), as described in paragraph (f)(2)(iii)(B) or 
(f)(2)(iv)(B) of this section. This paragraph (g)(2)(iv)(C) applies, 
for example, if an unpredictable contingent event occurs in the case of 
a plan with a presumed adjusted funding target attainment percentage of 
more than 60 percent where taking into account the unpredictable 
contingent event benefit in the inclusive presumed adjusted funding 
target would cause the ratio of the interim value of adjusted plan 
assets to the inclusive presumed adjusted funding target to be less 
than 60 percent.
    (v) Bankruptcy of plan sponsor. Pursuant to section 436(d)(2), 
during any period in which the plan sponsor of a plan is a debtor in a 
case under title 11, United States Code, or any similar Federal or 
State law (as described in paragraph (d)(2) of this section), no 
prohibited payment within the meaning of paragraph (j)(6) of this 
section may be paid if the plan's enrolled actuary has not yet 
certified the plan's adjusted funding target attainment percentage for 
the plan year to be at least 100 percent. Thus, the presumption rules 
of paragraph (h) of this section do not apply for purposes of section 
436(d)(2) and this paragraph (g)(2)(v).
    (3) Periods prior to certification during which no presumption 
applies--(i) Prohibited payments and benefit accruals. If no 
presumptions under section 436(h) apply to a plan during a period and 
the plan's enrolled actuary has not yet issued the certification of the 
plan's actual adjusted funding target attainment percentage for the 
plan year, the plan is not permitted to limit prohibited payments under 
paragraph (d) of this section or the accrual of benefits under 
paragraph (e) of this section based on an expectation that those 
paragraphs will apply to the plan once an actuarial certification is 
issued.

[[Page 53073]]

However, see paragraph (g)(2)(v) of this section for a restriction on 
prohibited payments during any period in which the plan sponsor of a 
plan is a debtor in a case under title 11, United States Code, or any 
similar Federal or State law.
    (ii) Unpredictable contingent event benefits and plan amendments 
increasing benefit liability--(A) In general. If no presumptions under 
section 436(h) apply to a plan during a period and the plan's enrolled 
actuary has not yet issued a certification of the plan's adjusted 
funding target attainment percentage for the plan year, the limitations 
on unpredictable contingent event benefits under paragraph (b) of this 
section and plan amendments increasing benefit liabilities under 
paragraph (c) of this section must be applied during that period by 
following the rules of paragraphs (g)(2)(iii) of this section, based on 
the inclusive presumed adjusted funding target determined using the 
prior plan year adjusted funding target attainment percentage. Thus, 
whether unpredictable contingent event benefits are permitted to be 
paid or a plan amendment is permitted to take effect during a plan year 
is determined by calculating the ratio of the interim value of adjusted 
plan assets to the inclusive presumed adjusted funding target, where 
the inclusive presumed adjusted funding target is determined by 
dividing the interim value of adjusted plan assets by the prior plan 
year adjusted funding target attainment percentage and then adding the 
adjustments described in paragraphs (g)(2)(iii)(A)(1), (2) and (3) of 
this section. If, after application of paragraphs (g)(2)(iii)(B) and 
(C) of this section, that ratio is less than the applicable threshold 
under section 436(b) or 436(c), then the plan is not permitted to 
provide any benefits attributable to the unpredictable contingent 
event, nor is the plan amendment permitted to take effect, unless the 
plan sponsor makes the contribution described in paragraph 
(g)(2)(iv)(C) of this section.
    (B) Recharacterization of contributions made to avoid benefit 
limitations. In any case where, pursuant to paragraph (g)(3)(ii)(A) of 
this section, the plan sponsor makes section 436 contributions to avoid 
the application of the applicable benefit limitation, to the extent 
those contributions would not be needed to permit the payment of the 
unpredictable contingent event benefits or for the plan amendment to go 
into effect based on a subsequent certification of the adjusted funding 
target attainment percentage for the current plan year that takes into 
account the increase in the liability attributable to the unpredictable 
contingent event benefits or plan amendment, the excess section 436 
contributions are recharacterized as employer contributions taken into 
account under section 430 for the current plan year.
    (4) Modification of the presumed AFTAP--(i) Section 436 
contributions. If, in accordance with the rules of paragraph (g)(2)(iv) 
of this section, unpredictable contingent event benefits are permitted 
to be paid, or a plan amendment takes effect, during the plan year 
because the plan sponsor makes a contribution described in paragraph 
(f)(2)(iii)(B) or (f)(2)(iv)(B) of this section, then the presumed 
adjusted funding target must be adjusted to reflect any increase in the 
funding target attributable to the unpredictable contingent event 
benefits or the plan amendment and the interim value of plan assets 
must be increased by the present value of the contribution. Similarly, 
if benefit accruals are permitted to resume in a plan year because the 
plan sponsor makes the contribution described in paragraph (f)(2)(v) of 
this section, then the presumed adjusted funding target must be 
adjusted to reflect any increase in the funding target attributable to 
the benefit accruals for the prior plan year and the interim value of 
adjusted plan assets must be increased by the present value of the 
contribution. The adjustment to the presumed adjusted funding target is 
made as of the date of the contribution, and that date is a section 436 
measurement date.
    (ii) Modification of the presumed AFTAP for reduction in balances. 
If a plan's funding standard carryover balance or prefunding balance is 
reduced under the rules of paragraph (g)(2) or (g)(3) of this section, 
then the presumed adjusted funding target attainment percentage for the 
plan year is increased to reflect the higher interim value of adjusted 
plan assets resulting from the reduction in the funding standard 
carryover balance or prefunding balance. The date of the event that 
causes the reduction is a section 436 measurement date.
    (5) Periods after certification of AFTAP--(i) Plan must follow 
certified AFTAP--(A) In general. The rules of paragraphs (g)(2) and 
(g)(3) of this section no longer apply for a plan year on and after the 
date the enrolled actuary for the plan issues a certification of the 
adjusted funding target attainment percentage of the plan for the 
current plan year, provided that the certification is issued before the 
first day of the 10th month of the plan year. For example, the plan 
must provide that the limitations on prohibited payments apply for 
distributions with annuity starting dates on and after the date of that 
certification using the certified adjusted funding target attainment 
percentage of the plan for the plan year. Similarly, the plan must 
provide that any prohibition on accruals under paragraph (e) of this 
section as a result of the enrolled actuary's certification that the 
adjusted funding target attainment percentage of the plan for the plan 
year is less than 60 percent is effective as of the date of the 
certification and that any prohibition on accruals ceases to be 
effective on the date the enrolled actuary issues a certification that 
the adjusted funding target attainment percentage of the plan for the 
plan year is at least 60 percent.
    (B) Unpredictable contingent events and plan amendments. In the 
case of a plan that has been issued a certification of the plan's 
adjusted funding target attainment percentage for a plan year by the 
plan's enrolled actuary, the plan sponsor must comply with the 
requirements of paragraphs (b) and (c) of this section for an 
unpredictable contingent event that occurs or a plan amendment that 
takes effect on or after the date of the enrolled actuary's 
certification. Thus, the plan administrator must determine if the 
adjusted funding target attainment percentage would be at or above the 
applicable threshold if it were modified to take into account--
    (1) The unpredictable contingent event or plan amendment;
    (2) Any other unpredictable contingent event benefits that were 
permitted to be paid as a result of any unpredictable contingent event 
that occurred, and any other plan amendment that took effect, earlier 
during the plan year to the extent not taken into account in the 
certified adjusted funding target attainment percentage for the plan 
year; and
    (3) Any earlier section 436 contributions made for the plan year to 
the extent those contributions were not taken into account in the 
certified adjusted funding target attainment percentage.
    (C) Application of rule for deemed election to reduce funding 
balances. After the adjusted funding target attainment percentage for a 
plan year is certified by the plan's enrolled actuary, the deemed 
election to reduce the prefunding and funding standard carryover 
balances under paragraph (a)(5) of this section must be reapplied based 
on the actual funding target for the year (provided the certification 
is issued before the first day of the 10th

[[Page 53074]]

month of the plan year). The reapplication of the rules under this 
paragraph (g)(5) regarding the deemed election in paragraph (a)(5) of 
this section may require an additional reduction in the prefunding and 
funding standard carryover balances if the amount of the reduction in 
the prefunding and funding standard carryover balances that is 
necessary to reach the applicable threshold to avoid the application of 
a section 436 limitation exceeds the amount that was initially reduced. 
Prior reductions of the prefunding and funding standard carryover 
balances continue to apply.
    (ii) Applicability to prior periods--(A) In general. Except as 
otherwise provided in this paragraph (g)(5)(ii), the enrolled actuary's 
certification of the adjusted funding target attainment percentage for 
the plan for the plan year does not affect prior periods. For example, 
the certification does not affect the application of the limitation 
under paragraph (d) of this section for distributions with annuity 
starting dates before the certification or the application of the 
limitation under paragraph (e) of this section prior to the date of 
that certification. See paragraph (a)(4) of this section for rules 
relating to the period of time after benefits cease to be limited. 
Except as otherwise provided in this paragraph (g)(5)(ii), the enrolled 
actuary's certification of the adjusted funding target attainment 
percentage for the plan for the plan year does not affect the 
application of the limitation under paragraph (b) or (c) of this 
section to unpredictable contingent event benefits, or a plan amendment 
that increases the liability for benefits, where the unpredictable 
contingent event occurs or the amendment takes effect during the 
periods to which paragraphs (g)(2) and (g)(3) of this section apply.
    (B) Special rule for unpredictable contingent event benefits. If a 
plan does not pay benefits attributable to an unpredictable contingent 
event because of the application of paragraph (g)(2)(iii)(D) or 
(g)(3)(ii)(A) of this section, then the plan must pay the benefits 
attributable to that event that were not previously paid if such 
benefits would be permitted under the rules of section 436 based on a 
certified adjusted funding target attainment percentage for the plan 
year that takes into account the increase in the funding target that 
would be attributable to those unpredictable contingent event benefits.
    (C) Special rule for plan amendments that increase liability. If a 
plan amendment does not take effect because of the application of 
paragraph (g)(2)(iii)(D) or (g)(3)(ii)(A) of this section, the plan 
amendment must go into effect if it would be permitted under the rules 
of section 436 based on a certified actual adjusted funding target 
attainment percentage for the plan year that takes into account the 
increase in the funding target attributable to the plan amendment, 
unless the plan amendment provides otherwise.
    (D) Ordering rule for multiple unpredictable contingent events or 
plan amendments. [Reserved]
    (6) Examples. The following examples illustrate the rules of this 
paragraph (g). Unless otherwise indicated, these examples are based on 
the following facts: each plan has a plan year that is the calendar 
year and a valuation date of January 1; section 436 applies to the plan 
beginning in 2008; the plan has no funding standard carryover balance; 
the plan sponsor is not in bankruptcy; no annuity purchases have been 
made from the plan; and the plan offers a lump sum form of payment. No 
plan is in at-risk status for the years discussed in the examples. The 
examples read as follows:

    Example 1. (i) The plan's certified AFTAP as of January 1, 2010, 
is 75%. As of January 1, 2011, Plan A has assets of $3,300,000 and a 
prefunding balance of $300,000. Beginning on January 1, 2011, Plan 
A's AFTAP for 2011 is presumed to be 75%, under the rules of 
paragraph (h) of this section and based on the certified AFTAP for 
2010.
    (ii) Based on Plan A's presumed AFTAP of 75%, Plan A would 
continue to be subject to the restriction on prohibited payments in 
paragraph (d)(3) of this section as of January 1, 2011. However, 
under the provisions of paragraph (a)(5) of this section, if the 
prefunding balance is large enough, Plan A's sponsor is deemed to 
elect to reduce the prefunding balance to the extent needed to avoid 
this restriction.
    (iii) The amount needed to avoid the restriction in paragraph 
(d)(3) of this section is determined by comparing the presumed 
adjusted funding target for Plan A with the interim value of 
adjusted plan assets as of the valuation date. The interim value of 
adjusted plan assets for Plan A is $3,000,000 (that is, the asset 
value of $3,300,000 reduced by the prefunding balance of $300,000). 
The presumed adjusted funding target for Plan A is the interim value 
of the adjusted plan assets divided by the presumed AFTAP, or 
$4,000,000 (that is, $3,000,000 divided by 75%).
    (iv) In order to avoid the restriction on prohibited payments in 
paragraph (d)(3) of this section, Plan A's presumed AFTAP must be 
increased to 80%. This requires an increase in Plan A's adjusted 
plan assets of $200,000 (that is, 80% of the presumed adjusted 
funding target of $4,000,000, minus the interim value of the 
adjusted plan assets of $3,000,000). Plan A's prefunding balance as 
of January 1, 2011, is reduced by $200,000 under the deemed election 
provisions of paragraph (a)(5) of this section. Accordingly, Plan 
A's prefunding balance is $100,000 (that is, $300,000 minus 
$200,000) and the interim value of adjusted plan assets is increased 
to $3,200,000 (that is, $3,300,000 minus the reduced prefunding 
balance of $100,000). Pursuant to paragraph (g)(4)(ii) of this 
section, the presumed adjusted funding target attainment percentage 
for Plan A is redetermined as 80% and Plan A must pay the full 
amount of the accelerated benefit distributions elected by 
participants with an annuity starting date of January 1, 2011, or 
later.
    Example 2. (i) The facts are the same as in Example 1. As of 
April 1, 2011, the enrolled actuary for Plan A has not certified the 
2011 AFTAP. Therefore, beginning April 1, 2011, Plan A's AFTAP is 
presumed to be reduced by 10 percentage points to 70%, in accordance 
with paragraph (h)(2) of this section. Under the provisions of 
paragraph (g)(2)(ii)(B) of this section, the deemed election to 
reduce the prefunding and funding standard carryover balances 
described in paragraph (a)(5) of this section must be reapplied 
based on the new presumed AFTAP.
    (ii) In accordance with paragraph (g)(2)(ii)(C) of this section, 
a new presumed adjusted funding target must be determined based on 
the new presumed AFTAP and must be compared to an updated interim 
value of adjusted plan assets. The new presumed adjusted funding 
target is $3,200,000 divided by the new presumed AFTAP of 70%, or 
$4,571,429.
    (iii) In order to avoid the restriction on prohibited payments 
in paragraph (d)(3) of this section, Plan A's presumed AFTAP must be 
increased to 80%. This requires an additional increase in Plan A's 
adjusted plan assets of $457,143 (that is, 80% of the new presumed 
adjusted funding target of $4,571,429, minus the updated interim 
value of the adjusted plan assets of $3,200,000 reflecting the 
deemed reduction in Plan A's prefunding balance).
    (iv) Plan A's remaining prefunding balance as of January 1, 
2011, is only $100,000, which is not enough to avoid the restriction 
on prohibited payments under paragraph (d)(3) of this section. 
Accordingly, unless Plan A's sponsor utilizes one of the methods 
described in paragraph (f) of this section to avoid the restriction, 
Plan A is subject to the restriction on prohibited payments in 
paragraph (d)(3) of this section and cannot pay accelerated benefit 
distributions elected by participants with an annuity starting date 
of April 1, 2011, or later.
    (v) Plan A's prefunding balance remains at $100,000 because, 
under paragraph (a)(5)(iii) of this section, the deemed reduction 
rules do not apply if the prefunding balance is not large enough to 
increase the adjusted value of plan assets enough to avoid the 
restriction. However, the earlier deemed reduction of $200,000 
continues to apply because all elections (including deemed 
elections) to reduce a plan's funding standard carryover balance or 
prefunding balance are irrevocable and must be unconditional in 
accordance with paragraph (g)(2)(ii)(A) of this section.
    Example 3. (i) The facts are the same as in Example 1. On July 
1, 2011, the enrolled actuary for Plan A calculates the actual 
adjusted funding target as $3,700,000 as of

[[Page 53075]]

January 1, 2011. Therefore, the 2011 AFTAP would have been 81.08% 
without reducing the prefunding balance (that is, plan assets of 
$3,300,000 minus the prefunding balance of $300,000, divided by the 
adjusted funding target of $3,700,000), and Plan A would not have 
been subject to the restrictions under paragraph (d)(3) of this 
section.
    (ii) However, paragraph (g)(5)(i)(C) of this section requires 
that any prior reductions in the prefunding or funding standard 
carryover balances continue to apply, and so Plan A's prefunding 
balance remains at the reduced amount of $100,000 as of January 1, 
2011. The enrolled actuary certifies that the 2011 AFTAP is 86.49% 
(that is, plan assets of $3,300,000 reduced by the prefunding 
balance of $100,000, divided by the adjusted funding target of 
$3,700,000).
    Example 4. (i) Plan B is a collectively bargained plan with 
assets of $2,500,000 and a prefunding balance of $150,000 as of 
January 1, 2011. On August 14, 2010, the enrolled actuary for Plan B 
certified the AFTAP for 2010 to be 83%. No unpredictable contingent 
events giving rise to unpredictable contingent event benefits 
occurred during 2010 and no plan amendments took effect in 2010 that 
were not taken into account in the certified AFTAP.
    (ii) On January 10, 2011, Plan B's sponsor amends the plan to 
increase benefits effective on February 1, 2011. The amendment would 
increase Plan B's funding target by $350,000. Under the rules of 
paragraph (g)(3) of this section, the determination of whether the 
amendment is permitted to take effect is based on a comparison of 
the inclusive presumed adjusted funding target with the updated 
interim value of adjusted plan assets.
    (iii) Plan B's interim value of adjusted plan assets as of the 
valuation date is $2,350,000 (that is, $2,500,000 minus the 
prefunding balance of $150,000). Prior to reflecting the amendment, 
Plan B's presumed adjusted funding target as of January 1, 2011, is 
$2,831,325, which is equal to the interim value of adjusted plan 
assets as of the valuation date of $2,350,000, divided by the 
presumed AFTAP of 83%. Increasing Plan B's presumed adjusted funding 
target by $350,000 to reflect the amendment results in an inclusive 
presumed adjusted funding target of $3,181,325 and would result in a 
presumed AFTAP of 73.87% (that is, the interim value of adjusted 
plan assets as of the valuation date of $2,350,000 divided by the 
inclusive presumed adjusted funding target of $3,181,325).
    (iv) Because Plan B's presumed AFTAP was over 80% prior to 
taking the amendment into account but would be less than 80% if the 
amendment were taken into account, section 436(c) and paragraph (c) 
of this section prohibit the plan amendment from taking effect 
unless the adjusted plan assets are increased so that the inclusive 
presumed AFTAP would be increased to 80%. This would require an 
additional amount of $195,060 (that is, 80% of the inclusive 
presumed adjusted funding target of $3,181,325 less the interim 
value of adjusted plan assets of $2,350,000).
    (v) Plan B's prefunding balance of $150,000 is not large enough 
for Plan B to avoid the restriction on plan amendments, and 
therefore the deemed election to reduce the prefunding balance under 
paragraph (a)(5) of this section does not apply, and the amendment 
cannot take effect unless the plan sponsor makes a contribution 
described in paragraph (f)(2) of this section.
    Example 5. (i) The facts are the same as in Example 4, except 
that Plan B's sponsor decides to make a contribution on February 1, 
2011, to avoid the benefit limitation as provided in paragraph 
(f)(2) of this section. As of February 1, 2011, Plan B's effective 
interest rate for the 2011 plan year has not yet been determined. 
Pursuant to paragraph (f)(2)(i)(A)(2) of this section, Plan B's 
effective interest rate for 2011 is treated as 6.25%, which is the 
largest of the three segment interest rates applicable to the 2011 
plan year, as provided in paragraph (f)(2)(i)(A)(2) of this section.
    (ii) The amount of the contribution as of January 1, 2011, 
needed to avoid the restriction on plan amendments under paragraph 
(c) of this section is $195,060. However, because the contribution 
is not paid until February 1, 2011, the necessary contribution 
amount must be adjusted to reflect interest that would otherwise 
have accrued between the valuation date and the date of the 
contribution, at Plan B's effective interest rate for the 2011 plan 
year. The amount of the required contribution after adjustment is 
$196,048, determined as $195,060 increased for one month of compound 
interest at an effective annual interest rate of 6.25%.
    (iii) In accordance with paragraph (g)(4)(i) of this section, 
the inclusive presumed AFTAP as of February 1, 2011, is 80 percent.
    Example 6. (i) The facts are the same as in Example 5. As of 
April 1, 2011, the enrolled actuary for the plan has not certified 
the 2011 AFTAP. Beginning April 1, 2011, Plan A's presumed AFTAP is 
equal to be 70%, 10 percentage points lower than the inclusive 
presumed AFTAP as of February 1, 2011, in accordance with paragraphs 
(g)(2)(iii)(A) and (h)(2) of this section. On July 1, 2011, the 
enrolled actuary for the plan calculates the actual adjusted funding 
target, prior to taking the plan amendment into account, as 
$2,700,000, and determines the actual effective interest rate for 
2011 to be 5.25%. On this basis, the actual AFTAP for 2011 (prior to 
taking the amendment into account) as 87.04% (that is, adjusted 
assets of $2,350,000 divided by the adjusted funding target of 
$2,700,000). Reflecting the $350,000 increase in funding target due 
to the plan amendment would increase the adjusted funding target to 
$3,050,000 and would decrease Plan B's AFTAP to 77.05%.
    (ii) Based on the calculated adjusted funding target, the amount 
that was necessary to avoid the benefit restriction under paragraph 
(c) of this section was $90,000 (that is, 80% of the adjusted 
funding target reflecting the plan amendment (or $3,050,000), minus 
the adjusted value of plan assets of $2,350,000). This amount must 
be adjusted for interest between the valuation date and the date the 
contribution was made using the effective interest rate for Plan B. 
Therefore, the amount required on the payment date of February 1, 
2011, was $90,385 (that is, $90,000 adjusted for compound interest 
for one month at Plan B's effective interest rate of 5.25% per 
year).
    (iii) Under paragraph (g)(3)(ii)(B) of this section, the 
contribution made on February 1, 2011, is recharacterized as an 
employer contribution under section 430 to the extent that it 
exceeded the amount necessary to avoid application of the 
restriction on plan amendments under paragraph (c) of this section. 
Therefore, $105,663 (that is, the $196,048 actual contribution paid 
on February 1, 2011, minus the $90,385 required contribution based 
on the actual AFTAP) is recharacterized as an employer contribution 
under section 430 for the 2011 plan year. As such, it may be applied 
toward the minimum required contribution for 2011, or the plan 
sponsor can elect to credit the contribution to Plan B's prefunding 
balance to the extent that the contributions for the 2011 plan year 
exceed the minimum required contribution.
    (iv) This recharacterization applied only because the 436 
contribution was made during a period prior to the certification of 
Plan B's actual AFTAP for 2011 and during which no presumption 
applied (that is, when section 436 is applied based on the 2010 
AFTAP, which was high enough that no restrictions applied for 2010). 
If the contribution had been made during a time when the 
presumptions applied (for instance, after April 1, 2011, when the 
presumed AFTAP was under 80%) then the only portion of the 436 
contribution that would be recharacterized as an employer 
contribution under section 430 would be the portion of the interest 
adjustment attributable to the difference between the highest 
segment rate (6.25%) and the plan's actual effective interest rate 
(5.25%), in accordance with paragraph (f)(2)(i)(A)(2) of this 
section.
    (v) After reflecting the plan amendment and the present value of 
the portion of the section 436 contribution that is not 
recharacterized as an employer contribution under section 430, the 
adjusted assets as of January 1, 2011, for purposes of section 436 
are $2,440,000 ($2,350,000 plus $90,000) and the inclusive adjusted 
funding target is $3,050,000. Accordingly, the enrolled actuary 
certifies the inclusive AFTAP for 2011 as 80% ($2,440,00 / 
$3,050,000). Note that assets for section 430 purposes are not 
increased to reflect the section 436 contribution as of January 1, 
2011.
    Example 7. (i) The facts are the same as in Example 6, except 
that on July 1, 2011, the enrolled actuary for Plan B calculates the 
actual adjusted funding target (before reflecting the plan 
amendment) as $3,000,000 and certifies the actual AFTAP as 78.33% 
prior to reflecting the plan amendment (that is, adjusted plan 
assets of $2,350,000 divided by the actual adjusted funding target 
of $3,000,000). Based on the provisions of paragraph (c) of this 
section, because the AFTAP prior to reflecting the amendment is less 
than 80%, the contribution required to avoid the restriction on plan 
amendments would have been the amount equal to the increase in 
funding target due to the plan amendment, or $350,000.
    (ii) However, according to paragraph (g)(5)(ii)(A) of this 
section, the enrolled actuary's certification of the 2011 AFTAP

[[Page 53076]]

does not affect the application of the limitation under paragraph 
(c) of this section to the amendment, because the amendment to Plan 
B took effect prior to the date of the certification. Therefore, it 
is not necessary for Plan B's sponsor to contribute an additional 
amount in order for the plan amendment to remain in effect 
regardless of the extent to which the certified AFTAP for the plan 
year is less than the presumed inclusive AFTAP.

    (h) Presumed underfunding for purposes of benefit limitations--(1) 
Presumption of continued underfunding--(i) In general. This paragraph 
(h)(1) applies to a plan for a plan year if a limitation under 
paragraph (b), (c), (d), or (e) of this section applied to the plan on 
the last day of the preceding plan year. If this paragraph (h)(1) 
applies to a plan, the first day of the plan year is a section 436 
measurement date and the presumed adjusted funding target attainment 
percentage for the plan is the percentage under paragraph (h)(1)(ii) or 
(iii) of this section, whichever applies to the plan, beginning on that 
first day of the plan year and ending on the date specified in 
paragraph (h)(1)(iv) of this section.
    (ii) Rule where preceding year certification issued during 
preceding year--(A) General rule. In any case in which the plan's 
enrolled actuary has issued a certification under paragraph (h)(4) of 
this section of the adjusted funding target attainment percentage for 
the plan year preceding the current plan year before the first day of 
the current plan year, the presumed adjusted funding target attainment 
percentage of the plan for the current plan year is equal to the prior 
plan year adjusted funding target attainment percentage until it is 
changed under paragraph (h)(1)(iv) of this section.
    (B) Special rule for late certifications. If the certification of 
the adjusted funding target attainment percentage for the prior plan 
year occurred after the first day of the 10th month of that prior plan 
year, the plan is treated as if no such certification was made, unless 
the certification took into account the effect of any unpredictable 
contingent event benefits that are permitted to be paid based on 
unpredictable contingent events that occurred, and any plan amendments 
that became effective, during the prior plan year but before the 
certification (and any associated section 436 contributions).
    (iii) No certification for preceding year issued during preceding 
year--(A) Deemed percentage continues. In any case in which the plan's 
enrolled actuary has not issued a certification under paragraph (h)(4) 
of this section of the adjusted funding target attainment percentage of 
the plan for the plan year preceding the current plan year during that 
prior plan year, the presumed adjusted funding target attainment 
percentage of the plan for the current plan year is equal to the 
presumed adjusted funding target attainment percentage that applied on 
the last day of the preceding plan year until the presumed adjusted 
funding target attainment percentage is changed under paragraph 
(h)(1)(iii)(B) or (h)(1)(iv) of this section. Thus, if the prior plan 
year was a 12-month plan year (so that the last day of the plan year 
was after the first day of the 10th month of the plan year and the 
rules of section 436(h)(2) and paragraph (h)(3) of this section applied 
to the plan for that plan year), then the presumed adjusted funding 
target attainment percentage for the current plan year is presumed to 
be less than 60 percent. By contrast, if the prior plan year was less 
than 9 months, the presumed adjusted funding target attainment 
percentage for the current plan year is the presumed adjusted funding 
target attainment percentage at the last day of the preceding plan 
year.
    (B) Enrolled actuary's certification in following year. In any case 
in which the plan's enrolled actuary has issued the certification under 
paragraph (h)(4) of this section of the adjusted funding target 
attainment percentage of the plan for the plan year preceding the 
current plan year on or after the first day of the current plan year, 
the date of that prior plan year certification is a new section 436 
measurement date for the current plan year. In such a case, the 
presumed adjusted funding target attainment percentage for the current 
plan year is equal to the prior plan year adjusted funding target 
attainment percentage (reduced by 10 percentage points if paragraph 
(h)(2)(iv) of this section applies to the plan) until it is changed 
under paragraph (h)(1)(iv) of this section. The rules of paragraph 
(h)(1)(ii)(B) of this section apply for purposes of determining whether 
the enrolled actuary has issued a certification of the adjusted funding 
target attainment percentage for the prior plan year during the current 
plan year.
    (iv) Duration of use of presumed adjusted funding target attainment 
percentage. If this paragraph (h)(1) applies to a plan for a plan year, 
the presumed adjusted funding target attainment percentage determined 
under this paragraph (h)(1) applies until the earliest of--
    (A) The first day of the 4th month of the plan year if paragraph 
(h)(2) of this section applies;
    (B) The first day of the 10th month of the plan year if paragraph 
(h)(3) of this section applies;
    (C) The date of a change in the presumed adjusted funding target 
attainment percentage under paragraph (g)(4) of this section; or
    (D) The date the enrolled actuary issues a certification under 
paragraph (h)(4) of this section of the adjusted funding target 
attainment percentage for the plan year.
    (2) Presumption of underfunding beginning on first day of 4th month 
for certain underfunded plans--(i) In general. This paragraph (h)(2) 
applies to a plan for a plan year if--
    (A) The enrolled actuary for the plan has not issued a 
certification of the adjusted funding target attainment percentage for 
the plan year before the first day of the 4th month of the plan year; 
and
    (B) The plan's adjusted funding target attainment percentage for 
the preceding plan year was either--
    (1) At least 60 percent but less than 70 percent; or
    (2) At least 80 percent but less than 90 percent.
    (ii) Special rule for first plan year a plan is subject to section 
436. This paragraph (h)(2) also applies to a plan for the first 
effective plan year if--
    (A) The enrolled actuary for the plan has not issued a 
certification of the adjusted funding target attainment percentage for 
the plan year before the first day of the 4th month of the plan year; 
and
    (B) The prior plan year adjusted funding target attainment 
percentage is at least 70 percent but less than 80 percent.
    (iii) Presumed adjusted funding target attainment percentage. If 
this paragraph (h)(2) applies to a plan for a plan year and the date of 
the enrolled actuary's certification of the adjusted funding target 
attainment percentage under paragraph (h)(4) of this section for the 
prior plan year (taking into account the special rules for late 
certifications under paragraph (h)(1)(ii)(B) of this section) occurred 
before the first day of the 4th month of the current plan year, then, 
commencing on the first day of the 4th month of the current plan year--
    (A) The presumed adjusted funding target attainment percentage of 
the plan for the plan year is reduced by 10 percentage points; and
    (B) The first day of the 4th month of the plan year is a section 
436 measurement date.
    (iv) Certification for prior plan year. If this paragraph (h)(2) 
applies to a plan and the date of the enrolled actuary's certification 
of the adjusted funding

[[Page 53077]]

target attainment percentage under paragraph (h)(4) of this section for 
the prior plan year (taking into account the rules for late 
certifications under paragraph (h)(1)(ii)(B) of this section) occurs on 
or after the first day of the 4th month of the current plan year, then, 
commencing on the date of that prior plan year certification--
    (A) The presumed adjusted funding target attainment percentage of 
the plan for the current plan year is equal to 10 percentage points 
less than the prior plan year adjusted funding target attainment 
percentage; and
    (B) The date of the prior plan year certification is a section 436 
measurement date.
    (v) Duration of use of presumed adjusted funding target attainment 
percentage. If this paragraph (h)(2) applies to a plan for a plan year, 
the presumed adjusted funding target attainment percentage determined 
under this paragraph (h)(2) applies until the earliest of--
    (A) The first day of the 10th month of the plan year if paragraph 
(h)(3) of this section applies;
    (B) The date of a change in the presumed adjusted funding target 
attainment percentage under paragraph (g)(4) of this section; or
    (C) The date the enrolled actuary issues a certification under 
paragraph (h)(4) of this section of the adjusted funding target 
attainment percentage for the plan year.
    (3) Presumption of underfunding beginning on first day of 10th 
month. In any case in which no certification of the specific adjusted 
funding target attainment percentage for the current plan year under 
paragraph (h)(4) of this section is made with respect to the plan 
before the first day of the 10th month of the plan year, then, 
commencing on the first day of the 10th month of the current plan 
year--
    (i) The presumed adjusted funding target attainment percentage of 
the plan for the plan year is presumed to be less than 60 percent; and
    (ii) The first day of the 10th month of the plan year is a section 
436 measurement date.
    (4) Certification of AFTAP--(i) Rules generally applicable to 
certifications--(A) In general. The enrolled actuary's certification 
referred to in this section must be made in writing, must be signed and 
dated to show the date of the signature, must be provided to the plan 
administrator, and, except as otherwise provided in paragraph 
(h)(4)(ii) of this section, must certify the plan's adjusted funding 
target attainment percentage for the plan year. Except in the case of a 
range certification described in paragraph (h)(4)(ii) of this section, 
the certification must set forth the value of plan assets, the 
prefunding balance, the funding standard carryover balance, the value 
of the funding target used in the determination, the aggregate amount 
of annuity purchases included in the adjusted value of plan assets and 
the adjusted funding target, the unpredictable contingent event 
benefits permitted to be paid for unpredictable contingent events that 
occurred during the current plan year that were taken into account for 
the current plan year (including any associated section 436 
contributions), the plan amendments that took effect in the current 
plan year that were taken into account for the current plan year 
(including any associated section 436 contributions), any benefit 
accruals that were restored for the plan year (including any section 
436 contributions), and any other relevant factors. The actuarial 
assumptions and funding methods used in the calculation for the 
certification must be the actuarial assumptions and funding methods 
used for the plan for purposes of determining the minimum required 
contributions under section 430 for the plan year.
    (B) Determination of plan assets. For purposes of making any 
determination of the adjusted funding target attainment percentage 
under this section, the determination is not permitted to include in 
plan assets contributions that have not been made to the plan by the 
certification date. Thus, the enrolled actuary's certification of the 
adjusted funding target attainment percentage for a plan year cannot 
take into account contributions that are expected to be made after the 
certification date. Notwithstanding the foregoing, for plan years 
beginning before January 1, 2009, the enrolled actuary's certification 
of the adjusted funding target attainment percentage is permitted to 
take into account employer contributions for the prior plan year that 
are reasonably expected to be made for that prior plan year but have 
not been contributed by the date of the enrolled actuary's 
certification. See paragraphs (h)(4)(iii) and (v) of this section for 
rules relating to changes in the certified percentage.
    (ii) Special rules for certification within range--(A) In general. 
Under this paragraph (h)(4)(ii), the plan's enrolled actuary is 
permitted to certify during a plan year that the plan's adjusted 
funding target attainment percentage for that plan year either is less 
than 60 percent, is 60 percent or higher (but is less than 80 percent), 
is 80 percent or higher, or is 100 percent or higher. If the enrolled 
actuary has issued such a range certification for a plan year and the 
enrolled actuary subsequently issues a certification of the specific 
adjusted funding target attainment percentage for the plan before the 
end of that plan year, then the certification of the specific adjusted 
funding target attainment percentage is treated as a change in the 
applicable percentage to which paragraph (h)(4)(iii) of this section 
applies.
    (B) Effect of range certification before certification of specific 
percentage. If a plan's enrolled actuary issues a range certification 
pursuant to this paragraph (h)(4)(ii), then, for purposes of this 
section (including application of the limitations of sections 436(b) 
and (c), contributions described in sections 436(b)(2), 436(c)(2), and 
436(e)(2), and the mandatory reduction of the prefunding and funding 
standard carryover balances under paragraph (a)(5) of this section), 
the plan is treated as having a certified percentage at the smallest 
value within the applicable range until a certification of the plan's 
specific adjusted funding target attainment percentage for the plan 
year has been issued under paragraph (h)(4)(i) of this section. 
However, if the plan's enrolled actuary has issued a range 
certification for the plan year but does not issue a certification of 
the specific adjusted funding target attainment percentage for the plan 
by the last day of that plan year, the adjusted funding target 
attainment percentage for the plan is retroactively deemed to be less 
than 60 percent as of the first day of the 10th month of the plan year.
    (C) Effect of range certification on and after certification of 
specific percentage. Once the certification of the specific adjusted 
funding target attainment percentage is issued by the plan's enrolled 
actuary, the certified percentage applies for all purposes of this 
section on and after the date of that certification. If the plan 
sponsor made section 436 contributions to avoid application of a 
benefit limitation during the period a range certification was in 
effect, those section 436 contributions are recharacterized as employer 
contributions under section 430 to the extent the contributions exceed 
the amount necessary to avoid application of a limitation based on the 
specific adjusted funding target attainment percentage as certified by 
the plan's enrolled actuary on or before the last day of the plan year.
    (iii) Change of certified percentage--(A) Application of new 
percentage. If the enrolled actuary for the plan provides a 
certification of the adjusted funding target attainment percentage of

[[Page 53078]]

the plan for the plan year under this paragraph (h)(4) (including a 
range certification) and that certified percentage is superseded by a 
subsequent determination of the adjusted funding target attainment 
percentage for that plan year, then, except to the extent provided in 
paragraph (h)(4)(iv)(B) of this section, that later percentage must be 
applied for the portion of the plan year beginning on the date of the 
earlier certification. The subsequent determination could be the 
correction of a prior incorrect certification or it could be an update 
of a prior correct certification to take into account subsequent facts 
under the rules of paragraph (h)(4)(v) of this section. The 
implications of such a change depend on whether the change is a 
material change or an immaterial change. See paragraph (h)(4)(iv) of 
this section.
    (B) Material change. A change in a plan's certified adjusted 
funding target attainment percentage constitutes a material change for 
a plan year if plan operations with respect to benefits that are 
addressed by section 436, taking into account any actual contributions 
and elections under section 430(f) made by the plan sponsor based on 
the prior certified percentage, would have been different based on the 
subsequent determination of the plan's adjusted funding target 
attainment percentage for the plan year. A change in a plan's adjusted 
funding target attainment percentage for a plan year can be a material 
change even if the only impact of the change occurs in the following 
plan year under the rules for determining the presumed adjusted funding 
target attainment percentage in that following year.
    (C) Immaterial change. In general, an immaterial change is any 
change in an adjusted funding target attainment percentage for a plan 
year that is not a material change. In addition, subject to the 
requirement to recertify the adjusted funding target attainment 
percentage in paragraph (h)(4)(v)(B) of this section, a change in 
adjusted funding target attainment percentage is deemed to be an 
immaterial change if it merely reflects a change in the funding target 
for the plan year or the value of the adjusted plan assets after the 
date of the enrolled actuary's certification resulting from--
    (1) Additional contributions for the preceding year that are made 
by the plan sponsor;
    (2) The plan sponsor's election to reduce the prefunding balance or 
funding standard carryover balance;
    (3) The plan sponsor's election to apply the prefunding balance or 
funding standard carryover balance to offset the prior plan year's 
minimum required contribution;
    (4) A change in funding method or actuarial assumptions, where such 
change required actual approval of the Commissioner (rather than deemed 
approval);
    (5) Unpredictable contingent event benefits which are permitted to 
be paid because the employer makes the section 436 contribution 
described in paragraph (f)(2)(iii)(A) of this section;
    (6) Unpredictable contingent event benefits which are permitted to 
be paid because the plan's enrolled actuary determines that the 
increase in the funding target attributable to the occurrence of the 
unpredictable contingent event would not cause the plan's adjusted 
funding target attainment percentage to fall below 60 percent;
    (7) A plan amendment which takes effect because the employer makes 
the section 436 contribution described in paragraph (f)(2)(iv)(A) of 
this section, the liability for which was not taken into account in the 
certification of the adjusted funding target attainment percentage; or
    (8) A plan amendment which takes effect because the plan's enrolled 
actuary determines that the increase in the funding target attributable 
to the plan amendment would not cause the plan's adjusted funding 
target attainment percentage to fall below 80 percent, the liability 
for which was not taken into account in the certification of the 
adjusted funding target attainment percentage.
    (iv) Effect of change in percentage--(A) Material change. In the 
case of a material change, if the plan's prior operations were in 
accordance with the prior certification of the adjusted funding target 
attainment percentage for the plan year (rather than the actual 
adjusted funding target attainment percentage for the plan year), then 
the plan will not have satisfied the requirements of section 401(a)(29) 
and section 436. Even if the plan's prior operations were in accordance 
with the subsequent certification of the adjusted funding target 
attainment percentage, the plan will not have satisfied the 
qualification requirements of section 401(a) because the plan will not 
have been operated in accordance with its terms during the period of 
time the prior certification applied. In addition, in the case of a 
material change, the rules requiring application of a presumed adjusted 
funding target attainment percentage under paragraphs (h)(1) through 
(h)(3) of this section continue to apply from and after the date of the 
prior certification until the date of the subsequent certification.
    (B) Immaterial change. An immaterial change in the adjusted funding 
target attainment percentage applies prospectively only and does not 
change the inapplicability of the presumptions under paragraphs (h)(1), 
(2), and (3) of this section prior to the date of the later 
certification.
    (v) Rules relating to updated certification--(A) In general. This 
paragraph (h)(4)(v) sets forth rules relating to updates of an 
actuary's certification of the plan's adjusted funding target 
attainment percentage for a plan year. Paragraphs (h)(4)(v)(B) and (D) 
of this section require that an updated adjusted funding target 
attainment percentage be certified in certain situations. Even if the 
updated adjusted funding target attainment percentage is not required 
to be certified, plan administrators may request that the actuary 
prepare an updated certification of the adjusted funding target 
attainment percentage, as described in paragraphs (h)(4)(v)(C) and (E) 
of this section. Any updated adjusted funding target attainment 
percentage determined under this paragraph (h)(4)(v) will apply 
beginning as of the date of the event that gave rise to the need for 
the update which is a section 436 measurement date. Thus, pursuant to 
this paragraph (h)(4)(v), the updated funding target attainment 
percentage applies thereafter for all purposes of section 436, 
including application with respect to unpredictable contingent events 
occurring on or after the measurement date (but not for unpredictable 
contingent events that occurred before such measurement date or for 
benefits with annuity starting dates before that measurement date). The 
updated adjusted funding target attainment percentage will continue to 
apply for the remainder of the plan year and will be used for the 
presumed adjusted funding target attainment percentage for the next 
plan year, unless there is a later updated certification of adjusted 
funding target attainment percentage for the plan year.
    (B) Requirement to recertify AFTAP if plan sponsor contributes to 
threshold. If, during the plan year, unpredictable contingent event 
benefits are permitted to be paid, a plan amendment takes effect, or 
benefits are permitted to accrue because the plan sponsor makes a 
contribution described in paragraph (f)(2)(iii)(B), (f)(2)(iv)(B), or 
(f)(2)(v) of this section, then, in accordance with paragraph 
(f)(2)(ii)(C) of this section, the plan's enrolled actuary must issue 
an updated certification of the adjusted

[[Page 53079]]

funding target attainment percentage that takes into account such 
contribution as well as the liability for unpredictable contingent 
event benefits that are permitted to be paid, plan amendments that take 
effect during the plan year, and restored benefits.
    (C) Optional recertification of AFTAP after other unpredictable 
contingent event or plan amendment. Except as provided in paragraph 
(h)(4)(v)(D) of this section, if, during a plan year, unpredictable 
contingent event benefits are permitted to be paid, or a plan amendment 
takes effect, because either the plan sponsor makes a contribution 
described in paragraph (f)(2)(iii)(A) or (f)(2)(iv)(A) of this section, 
or the plan's enrolled actuary determines that the increase in the 
funding target attributable to the occurrence of the unpredictable 
contingent event or the plan amendment would not cause the plan's 
adjusted funding target attainment percentage to fall below the 
applicable 60 percent or 80 percent threshold (taking into account the 
occurrence of all previous unpredictable contingent event benefits and 
plan amendments to the extent not already reflected in the certified 
adjusted funding target attainment percentage for the plan year (or 
update)), then the plan administrator may request that the plan actuary 
issue an updated certification of the adjusted funding target 
attainment percentage that takes into account the unpredictable 
contingent event benefits or plan amendments and any associated section 
436 contribution.
    (D) Requirement to recertify AFTAP after deemed immaterial change. 
If a change in the adjusted funding target attainment percentage as a 
result of one of the items listed in paragraph (h)(4)(iii)(C) of this 
section would be a material change, then the change is treated as an 
immaterial change only if the plan's enrolled actuary recertifies the 
adjusted funding target attainment percentage for the plan year as soon 
as practicable after the event that gives rise to the change.
    (E) Optional recertification after other immaterial change. If a 
change in the adjusted funding target attainment percentage is 
immaterial, then the plan administrator may request that the plan 
actuary issue an updated certification of the adjusted funding target 
attainment percentage that takes into account the unpredictable 
contingent event benefits or plan amendments and any associated section 
436 contribution.
    (5) Examples of rules of paragraphs (h)(1), (h)(2), and (h)(3) of 
this section. The following examples illustrate the rules of paragraphs 
(h)(1), (h)(2), and (h)(3) of this section. Unless otherwise indicated, 
the examples in this section are based on the information in this 
paragraph (h)(5). 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 plan year is subject to section 436 in 2008. The 
plan does not have a funding standard carryover balance or a prefunding 
balance as of any of the dates mentioned, and the plan sponsor does not 
elect to utilize any of the methods in paragraph (f) of this section to 
avoid applicable benefit restrictions. No range certification under 
paragraph (h)(4) of this section has been issued. The plan sponsor is 
not in bankruptcy. The examples read as follows:

    Example 1.  (i) On July 15, 2010, the adjusted funding target 
attainment percentage (``AFTAP'') for Plan T for 2010 is certified 
to be 65%. Based on this AFTAP, Plan T is subject to the restriction 
on prohibited payments in paragraph (d)(3) of this section for the 
remainder of 2010.
    (ii) Beginning January 1, 2011, Plan T's AFTAP for 2011 is 
presumed to be equal to the AFTAP for 2010, or 65%, under the 
provisions of paragraph (h)(1)(ii) of this section. Accordingly, the 
restriction on prohibited payments in paragraph (d)(3) of this 
section continues to apply.
    (iii) On March 1, 2011, the enrolled actuary for the plan 
certifies that the actual AFTAP for 2011 is 80%. Therefore, 
beginning March 1, 2011, Plan T is no longer subject to the 
restriction under paragraph (d)(3) of this section, and so Plan T 
resumes paying the full amount of any prohibited payments elected by 
participants with an annuity starting date of March 1, 2011, or 
later.
    Example 2. (i) The facts are the same as in Example 1, except 
that the enrolled actuary for the plan does not certify the AFTAP 
for 2011 until June 1, 2011, when it is certified to be 66%.
    (ii) Beginning January 1, 2011, Plan T's AFTAP for 2011 is 
presumed to be equal to the AFTAP for 2010, or 65%, under the 
provisions of paragraph (h)(1)(ii) of this section. Accordingly, the 
restriction on prohibited payments in paragraph (d)(3) of this 
section continues to apply.
    (iii) Pursuant to paragraph (h)(2)(iv) of this section, 
beginning April 1, 2011, the AFTAP for 2011 is presumed to be 55% 
(10 percentage points less than the AFTAP for 2010). Plan T is 
subject to the restriction on prohibited payments under paragraph 
(d)(1) of this section for annuity starting dates on or after April 
1, 2011. In addition, Plan T is subject to the restriction on 
unpredictable contingent event benefits under paragraph (b) of this 
section for unpredictable contingent events occurring on or after 
April 1, 2011 and benefits are required to be frozen on and after 
April 1, 2011 under paragraph (e) of this section.
    (iv) Once the enrolled actuary for the plan certifies that the 
AFTAP for 2011 for Plan T is 66%, Plan T is no longer subject to the 
restriction under paragraph (d)(1) of this section, but it is 
subject to the restriction under paragraph (d)(3) of this section. 
Plan T must resume paying prohibited payments, as restricted under 
paragraph (d)(3) of this section, for participants who elect 
benefits in accelerated forms of payment and who have an annuity 
starting date of June 1, 2011, or later. In addition, Plan T must 
provide benefits for any unpredictable contingent event occurring on 
or after January 1, 2011, to the extent permitted under paragraph 
(b) of this section. Similarly, Plan T is no longer subject to the 
restriction on benefit accruals under paragraph (e) of this section, 
and benefit accruals resume under Plan T beginning June 1, 2011, 
unless Plan T provides otherwise.
    Example 3.  (i) The facts are the same as in Example 1, except 
that the enrolled actuary for the plan does not certify the 2011 
AFTAP until November 15, 2011. Beginning October 1, 2011, Plan T is 
conclusively presumed to have an AFTAP of less than 60%, in 
accordance with the provisions of paragraph (h)(3) of this section. 
Accordingly, Plan T is subject to the restrictions in paragraphs 
(b), (d)(1), and (e) of this section commencing on October 1, 2011.
    (ii) On November 15, 2011, the enrolled actuary for the plan 
certifies that the AFTAP for 2011 is 72%. However, because the 
certification occurred after September 30, 2011, the certification 
does not constitute a new section 436 measurement date, and Plan T 
continues to be subject to the restrictions on unpredictable 
contingent event benefits, prohibited payments, and benefit accruals 
under paragraphs (b), (d)(1), and (e) of this section.
    (iii) Beginning January 1, 2012, the 2012 AFTAP for Plan T is 
presumed to be equal to the 2011 AFTAP of 72%. Because the presumed 
2012 AFTAP is between 70% and 80% and, therefore, paragraph (h)(2) 
of this section (which provides for a 10 percentage point reduction 
in a plan's AFTAP in certain cases) will not apply, the presumed 
AFTAP will remain at 72% until the plan's enrolled actuary certifies 
the AFTAP for 2012 or until paragraph (h)(3) of this section applies 
on the first day of the 10th month of the plan year. Because the 
presumed AFTAP is 72%, Plan T is no longer subject to the 
restrictions on prohibited payments under paragraph (d)(1) of this 
section, and Plan T must provide benefits for any unpredictable 
contingent event occurring on or after January 1, 2012, to the 
extent permitted under paragraph (b) of this section and must resume 
paying prohibited payments, as restricted under paragraph (d)(3) of 
this section, that are elected by participants with annuity starting 
dates on or after January 1, 2012. Similarly, Plan T is no longer 
subject to the restriction on benefit accruals under paragraph (e) 
of this section, and benefit accruals resume under Plan T beginning 
January 1, 2012, unless Plan T provides otherwise.
    Example 4.  (i) The facts are the same as in Example 3, except 
that the enrolled actuary for the plan does not issue a 
certification of the AFTAP for 2011 for Plan T until February 1, 
2012.
    (ii) Beginning on January 1, 2012, the presumptions in paragraph 
(h)(1)(iii) of this section apply for the 2012 plan year. Because 
the enrolled actuary for the plan has not

[[Page 53080]]

certified the AFTAP for 2011, the presumed AFTAP as of October 1, 
2011, continues to apply for the period beginning January 1, 2012. 
Therefore, the AFTAP as of January 1, 2012, is presumed to be less 
than 60%, and Plan T continues to be subject to the restrictions on 
unpredictable contingent event benefits under paragraph (b) of this 
section, prohibited payments under paragraph (d)(1) of this section, 
and benefit accruals under paragraph (e) of this section.
    (iii) On February 1, 2012, the enrolled actuary for the plan 
certifies that the AFTAP for 2011 for Plan T is 65%. Because the 
enrolled actuary for the plan has not issued a certification of the 
AFTAP for 2012, the provisions of paragraph (h)(1)(iii)(B) of this 
section apply. Accordingly, the certification date for the 2011 
AFTAP (February 1, 2012) is a section 436 measurement date and 65% 
is the presumed AFTAP for 2012 beginning on that date.
    (iv) Because the presumed AFTAP is over 60% but less than 80%, 
the full restriction on prohibited payments under paragraph (d)(1) 
of this section no longer applies; however, the partial restriction 
on prohibited payments under paragraph (d)(3) of this section 
applies beginning on February 1, 2012. Therefore, Plan T must pay a 
portion of the prohibited payments elected by participants with 
annuity starting dates on or after February 1, 2012. Furthermore, 
based on the presumed AFTAP of 65%, the restriction on unpredictable 
contingent event benefits under paragraph (b) of this section ceases 
to apply for events occurring on or after February 1, 2012, to the 
extent permitted under paragraph (b) of this section and the 
restriction on benefit accruals under paragraph (e) of this section 
no longer applies so that, unless Plan T provides otherwise, benefit 
accruals will resume as of February 1, 2012.
    Example 5. (i) The facts are the same as in Example 3, except 
that the enrolled actuary for the plan does not issue a 
certification of the actual AFTAP for Plan T as of January 1, 2011, 
until May 1, 2012.
    (ii) Beginning on January 1, 2012, the presumptions in paragraph 
(h)(1)(iii) of this section apply for the 2012 plan year. Because 
the enrolled actuary for the plan has not certified the actual AFTAP 
as of January 1, 2011, the presumed AFTAP as of October 1, 2011, 
continues to apply for the period beginning January 1, 2012. 
Therefore, the AFTAP as of January 1, 2012, is presumed to be less 
than 60%, and Plan T continues to be subject to the restrictions on 
unpredictable contingent event benefits under paragraph (b) of this 
section, on prohibited payments under paragraph (d)(1) of this 
section, and on benefit accruals under paragraph (e) of this 
section.
    (iii) Since the enrolled actuary for the plan has not issued a 
certification of the actual AFTAP as of January 1, 2011, the rules 
of paragraph (h)(1)(iii) of this section apply beginning April 1, 
2012, and the AFTAP is presumed to remain less than 60%. Plan T 
continues to be subject to the restrictions on unpredictable 
contingent event benefits under paragraph (b) of this section, on 
prohibited payments under paragraph (d)(1) of this section, and on 
benefit accruals under paragraph (e) of this section.
    (iv) On May 1, 2012, the enrolled actuary for the plan certifies 
that the actual AFTAP for 2011 for Plan T is 65%. Because the 
enrolled actuary for the plan has not issued a certification of the 
actual AFTAP as of January 1, 2012, the provisions of paragraph 
(h)(2)(iv) of this section apply. Accordingly, on May 1, 2012, the 
2012 AFTAP is presumed to be 10 percentage points less than the 2011 
AFTAP, or 55%, so that the restrictions under paragraphs (b), (d), 
and (e) of this section continue to apply.
    Example 6. (i) The enrolled actuary for Plan V certifies the 
plan's AFTAP for 2010 to be 69%. Based on this AFTAP, Plan V is 
subject to the restriction in paragraph (d)(3) of this section, and 
can only pay a portion (generally 50%) of the prohibited payments 
otherwise due to plan participants who commence benefits while the 
restriction is in effect. The enrolled actuary for the plan does not 
issue a certification of the AFTAP for 2011 until June 1, 2011.
    (ii) Beginning January 1, 2011, Plan V's 2011 AFTAP is presumed 
to be equal to the 2010 AFTAP, or 69%, under the provisions of 
paragraph (h)(1)(ii) of this section. Accordingly, the restriction 
on prohibited payments in paragraph (d)(3) of this section continues 
to apply from January 1, 2011, through March 31, 2011, and Plan T 
may only pay a portion of the prohibited payments otherwise due to 
participants who commence benefit payments during this period.
    (iii) Beginning April 1, 2011, the provisions of paragraph 
(h)(2)(ii) of this section apply. Under those provisions, the AFTAP 
beginning April 1, 2011, is presumed to be 10 percentage points 
lower than the presumed 2011 AFTAP, or 59%. Because Plan V's 
presumed AFTAP for 2011 is less than 60%, the restrictions on 
unpredictable contingent event benefits under paragraph (b) of this 
section, on the payment of accelerated benefit distributions under 
paragraph (d)(1) of this section, and on benefit accruals under 
paragraph (e) of this section apply. Accordingly, Plan V cannot pay 
any unpredictable contingent event benefits for events occurring on 
or after April 1, 2011, or prohibited payments to participants with 
an annuity starting date on or after April 1, 2011, and benefit 
accruals cease as of April 1, 2011.
    (iv) On June 1, 2011, Plan V's enrolled actuary certifies that 
the plan's AFTAP for 2011 is 71%. Therefore, the restrictions on 
unpredictable contingent event benefits, prohibited payments, and 
benefit accruals in paragraphs (b), (d)(1), and (e) of this section 
no longer apply, but the partial restriction on benefit payments in 
paragraph (d)(3) of this section does apply. Accordingly, Plan V 
begins paying unpredictable contingent event benefits for events 
occurring on or after January 1, 2011, to the extent permitted under 
paragraph (b) of this section and a portion of the prohibited 
payments elected by participants with an annuity starting date on or 
after June 1, 2011. Benefit accruals previously restricted under 
paragraph (e) of this section resume effective June 1, 2011, unless 
Plan V provides otherwise.
    (v) Participants who were not able to elect an accelerated form 
of payment during the period from April 1, 2011, through May 31, 
2011, would be able to elect a new annuity starting date with a 
partial distribution of accelerated benefits effective June 1, 2011, 
if Plan V contained a preexisting provision permitting such an 
election after the restriction in paragraph (d)(1) of this section 
no longer applies. This is permitted because, under paragraph 
(a)(4)(ii)(B) of this section, a preexisting provision of this type 
is not considered a plan amendment and is therefore not subject to 
the plan amendment restriction in paragraph (c) of this section even 
though Plan V's AFTAP for 2011 is less than 80%.
    (vi) Benefit accruals for the period beginning April 1, 2011, 
through May 31, 2011, would be automatically restored if Plan V 
contained a preexisting provision to retroactively restore benefit 
accruals restricted under paragraph (e) of this section after the 
restriction no longer applies. This is permitted because under 
paragraph (a)(4)(ii)(B) of this section, a preexisting provision of 
this type is not considered to be a plan amendment and is therefore 
not subject to the plan amendment restriction in paragraph (c) of 
this section even though Plan V's AFTAP for 2011 is less than 80%, 
because the period of the restriction did not exceed 12 months.

    (6) Examples of rules of paragraph (h)(4) of this section. The 
following examples illustrate the rules of paragraph (h)(4) of this 
section:

    Example 1. (i) Plan Y is a non-collectively bargained defined 
benefit plan with a plan year that is the calendar year and a 
valuation date of January 1. Plan Y does not have a funding standard 
carryover balance or a prefunding balance. Plan Y's sponsor is not 
in bankruptcy. In June of 2010, the actual AFTAP for 2010 for Plan Y 
is certified as 65%. On the last day of the 2010 plan year, Plan Y 
is subject to the restrictions in paragraph (d)(3) of this section.
    (ii) The enrolled actuary for the plan issues a range 
certification on March 21, 2011, certifying that the AFTAP for 2011 
is at least 60% and less than 80%. Because the certification was 
issued before the first day of the 4th month of the plan year, the 
10 percentage point reduction in the presumed AFTAP under paragraph 
(h)(2) of this section does not apply. In addition, because the 
enrolled actuary for the plan has certified that the AFTAP is within 
this range, Plan Y is not subject to the full restriction on 
accelerated benefit payments in paragraph (d)(1) of this section or 
the restriction on benefit accruals under paragraph (e) of this 
section.
    (iii) On August 1, 2011, the enrolled actuary for the plan 
certifies that the actual AFTAP as of January 1, 2011, is 75.86%. 
This AFTAP falls within the previously certified range. Thus, the 
change is immaterial under paragraph (h)(4)(iii) of this section and 
the new certification does not change the applicability or 
inapplicability of the restrictions in this section.
    Example 2. (i) The facts are the same as in Example 1, except 
that the plan sponsor makes an additional contribution for the 2010 
plan year on September 1, 2011, that is

[[Page 53081]]

not added to the prefunding balance. Reflecting this contribution, 
the enrolled actuary for the plan issues a revised certification 
stating that the AFTAP for 2011 is 81%, and Plan Y is no longer 
subject to the restriction on accelerated benefit payments under 
paragraph (d)(3) of this section on that date.
    (ii) Although the revised certification changes the 
applicability of the restriction under paragraph (d)(3) of this 
section, the change is not a material change under paragraph 
(h)(4)(iii)(C)(1) of this section because the AFTAP changed only 
because of additional contributions for the preceding year made by 
the plan sponsor after the date of the enrolled actuary's initial 
certification.

    (i) [Reserved]
    (j) Definitions. For purposes of this section--
    (1) Adjusted funding target attainment percentage--(i) In general. 
Except as otherwise provided in this paragraph (j)(1), the adjusted 
funding target attainment percentage for a plan year is the fraction 
(expressed as a percentage)--
    (A) The numerator of which is the adjusted plan assets for the plan 
year described in paragraph (j)(1)(ii) of this section; and
    (B) The denominator of which is the adjusted funding target for the 
plan year described in paragraph (j)(1)(iii) of this section.
    (ii) Adjusted plan assets--(A) General rule. The adjusted plan 
assets for a plan year is generally determined by--
    (1) Subtracting the plan's funding standard carryover balance and 
prefunding balance as of the valuation date from the value of plan 
assets for the plan year under section 430(g) (but treating the 
resulting value as zero if it is below zero); and
    (2) Increasing the resulting value by the aggregate amount of 
purchases of annuities for participants and beneficiaries (other than 
participants who, at the time of the purchase, were highly compensated 
employees as defined in section 414(q), which definition includes 
highly compensated former employees under Sec.  1.414(q)-1T, Q&A-4) 
which were made by the plan during the preceding 2 plan years, to the 
extent not included in plan assets for purposes of section 430.
    (B) Special rule for plans that are fully funded without regard to 
subtraction of funding balances from plan assets. If for a plan year 
the value of plan assets determined without subtracting the funding 
standard carryover balance and the prefunding balance is not less than 
100 percent of the plan's funding target determined under section 430 
without regard to section 430(i), then the adjusted value of plan 
assets used in the calculation of the adjusted funding target 
attainment percentage for the plan year is determined without 
subtracting the plan's funding standard carryover balance and 
prefunding balance from the value of plan assets for the plan year.
    (C) Special rule for plans with section 436 contributions. If an 
employer makes a contribution described in paragraph (f)(2) of this 
section after the valuation date in order to avoid or terminate 
limitations under section 436, then the present value of that 
contribution (determined using the effective interest rate under 
section 430(h)(2)(A) for the plan year) is permitted to be added to the 
plan assets as of the valuation date for purposes of determining or 
redetermining the adjusted funding target attainment percentage for a 
plan year, but only if the liability for the benefits, amendment, or 
accruals that would have been limited (but for the contribution) is 
included in determining the adjusted funding target for the plan year.
    (D) Transition rule. Paragraph (j)(1)(ii)(B) of this section is 
applied to plan years beginning after 2007 and before 2011 by 
substituting for ``100 percent'' the applicable percentage determined 
in accordance with the following table:

------------------------------------------------------------------------
   In the case of a plan year beginning in calendar      The applicable
                        year:                            percentage is:
------------------------------------------------------------------------
2008.................................................                 92
2009.................................................                 94
2010.................................................                 96
------------------------------------------------------------------------

    (E) Limitation on transition rule. Paragraph (j)(1)(ii)(D) of this 
section does not apply with respect to the current plan year unless, 
for each plan year beginning after December 31, 2007, and before the 
current plan year, the value of plan assets determined without 
subtracting the funding standard carryover balance and the prefunding 
balance is not less than the product of--
    (1) The applicable percentage determined under paragraph 
(j)(1)(ii)(D) of this section for that plan year; and
    (2) The funding target (determined without regard to the at-risk 
rules of section 430(i)) for that plan year.
    (iii) Adjusted funding target--(A) In general. Except as otherwise 
provided in this paragraph (j)(1)(iii), the adjusted funding target 
equals the funding target for the plan year, determined in accordance 
with the rules set forth in Sec.  1.430(d)-1, but without regard to the 
at-risk rules under section 430(i), increased by the aggregate amount 
of purchases of annuities that were added to assets for purposes of 
determining the plan's adjusted plan assets under paragraph 
(j)(1)(ii)(A)(2) of this section. The definition of adjusted funding 
target for a plan maintained by a commercial airline for which the plan 
sponsor has made the election described in section 402(a)(1) of Pension 
Protection Act of 2006 (PPA '06), Public Law 109-280 (120 Stat. 780), 
is the same as if it did not make such an election.
    (B) Adjusted funding target after updated certification. After the 
plan's enrolled actuary prepares an updated certification of the 
adjusted funding target attainment percentage under paragraph (h)(4)(v) 
of this section, the adjusted funding target will also be updated to 
reflect unpredictable contingent event benefits and plan amendments not 
already taken into account.
    (iv) Plans with zero adjusted funding target. If the adjusted 
funding target for the plan year is zero, then the adjusted funding 
target attainment percentage for the plan year is 100 percent.
    (v) Plans with end of year valuation dates. [Reserved]
    (vi) Special rule for plans that are the result of a merger. 
[Reserved]
    (vii) Special rule for plans that are involved in a spinoff. 
[Reserved]
    (2) Annuity starting date--(i) General rule. The term annuity 
starting date means, as applicable--
    (A) The first day of the first period for which an amount is 
payable as an annuity as described in section 417(f)(2)(A)(i);
    (B) In the case of a benefit not payable in the form of an annuity, 
the annuity starting date is the annuity starting date for the 
qualified joint and survivor annuity that is payable under the plan at 
the same time as the benefit that is not payable as an annuity;
    (C) In the case of an amount payable under a retroactive annuity 
starting date, the benefit commencement date (instead of the date 
determined under paragraphs (j)(2)(i)(A) and (B) of this section);
    (D) The date of the purchase of an irrevocable commitment from an 
insurer to pay benefits under the plan; and
    (E) The date of any transfer to another plan described in paragraph 
(j)(6)(i)(C) of this section.
    (ii) Special rule for beneficiaries. If a participant commences 
benefits at an annuity starting date (as defined in paragraph (j)(2)(i) 
of this section) and, after the death of the participant, payments 
continue to a beneficiary, the annuity starting date for the payments 
to the participant constitutes the annuity starting date for payments 
to the beneficiary, except that a new annuity starting date occurs 
(determined by applying paragraph (j)(2)(i)(A), (B), and

[[Page 53082]]

(C) of this section to the payments to the beneficiary) if the amounts 
payable to all beneficiaries of the participant in the aggregate at any 
future date can exceed the monthly amount that would have been paid to 
the participant had he or she not died.
    (3) First effective plan year. The first effective plan year for a 
plan is the first plan year to which section 436 applies to the plan 
under paragraph (k)(1) or (k)(2) of this section.
    (4) Funding target. In general, the funding target means the 
funding target under Sec.  1.430(d)-1, without regard to the at-risk 
rules under section 430(i) and Sec.  1.430(i)-1. However, solely for 
purposes of sections 436(b)(2)(A) and (c)(2)(A), the funding target 
means the funding target under Sec.  1.430(i)-1 if the plan is in at-
risk status for the plan year.
    (5) Prior plan year adjusted funding target attainment percentage--
(i) In general. Except as otherwise provided in this paragraph (j)(5), 
the prior plan year adjusted funding target attainment percentage is 
the adjusted funding target attainment percentage determined under 
paragraph (j)(1) of this section for the immediately preceding plan 
year.
    (ii) Special rules--(A) Special rule for new plans. In the case of 
a plan established during the plan year that was not the result of a 
merger or spinoff, the adjusted funding target attainment percentage is 
equal to 100 percent for plan years before the plan was established. 
Except as otherwise provided in paragraph (j)(5)(ii)(B) of this 
section, a plan that has a predecessor plan in accordance with Sec.  
1.415(f)-1(c) is not a plan established during the plan year under this 
paragraph (j)(5)(ii)(A). Instead, if the plan has a predecessor plan, 
the adjusted funding target attainment percentage for the prior plan 
year is the adjusted funding target attainment percentage for the prior 
plan year for the predecessor plan (and that predecessor plan's 
adjusted funding target attainment percentage is treated as equal to 
100 percent on any date on which it is terminated, other than in a 
distress termination).
    (B) Special rules for plans that are the result of a merger. 
[Reserved]
    (C) Special rules for plans that are involved in a spinoff. 
[Reserved]
    (iii) Special rules for 2007 plan year--(A) General determination 
of 2007 adjusted funding target attainment percentage. In the case of 
the first plan year beginning in 2008, except as otherwise provided in 
this paragraph (j)(5), the adjusted funding target attainment 
percentage for the immediately preceding plan year (the 2007 plan year) 
is determined as the fraction (expressed as a percentage)--
    (1) The numerator of which is the value of plan assets determined 
under paragraph (j)(5)(iii)(B) of this section increased by the 
aggregate amount of purchases of annuities for participants and 
beneficiaries (other than participants who, at the time of the 
purchase, were highly compensated employees as defined in section 
414(q), which definition includes highly compensated former employees 
under Sec.  1.414(q)-1T, Q&A-4 which were made by the plan during the 
preceding 2 plan years, to the extent not included in plan assets under 
section 412(c)(2) (as in effect prior to amendment by PPA '06); and
    (2) The denominator of which is the plan's current liability 
determined pursuant to section 412(l)(7) (as in effect prior to 
amendment by PPA '06) on the valuation date for the 2007 plan year 
increased by the aggregate amount of purchases of annuities that were 
added to the plan assets under the rules of paragraph (j)(5)(iii)(A)(1) 
of this section.
    (B) General determination of value of plan assets--(1) In general. 
The value of plan assets for purposes of this paragraph (j)(5)(iii) is 
determined under section 412(c)(2) as in effect for the 2007 plan year, 
except that the value of plan assets prior to subtracting the plan's 
funding standard account credit balance described in paragraph 
(j)(5)(iii)(B)(2) of this section must be adjusted so that the value of 
plan assets is neither less than 90 percent of the fair market value of 
plan assets nor greater than 110 percent of the fair market value of 
plan assets on the valuation date for that plan year.
    (2) Subtraction of credit balance. If a plan has a funding standard 
account credit balance as of the valuation date for the 2007 plan year, 
that balance is subtracted from the value of plan assets described in 
paragraph (j)(5)(iii)(B)(1) of this section as of that valuation date. 
However, the subtraction does not apply if the value of plan assets 
prior to adjustment under paragraph (j)(5)(iii)(B)(1) of this section 
is greater than or equal to 90 percent of the plan's current liability 
as of the valuation date for the 2007 plan year.
    (3) Effect of funding standard carryover balance reduction for 2007 
plan year. Notwithstanding paragraph (j)(5)(iii)(B)(2) of this section, 
if, for the first plan year beginning in 2008, the employer has made an 
election to reduce some or all of the funding standard carryover 
balance as of the first day of that year in accordance with Sec.  
1.430(f)-1(e), then the present value (determined as of the valuation 
date for the 2007 plan year using the valuation interest rate for that 
plan year) of the amount so reduced is not treated as part of the 
funding standard account credit balance when that balance is subtracted 
from the asset value under paragraph (j)(5)(iii)(B)(2) of this section.
    (C) Plan with end-of-year valuation date. With respect to the first 
plan year beginning in 2008, if the plan had a valuation date under 
section 412 that was the last day of the plan year for each of the plan 
years beginning in 2006 and 2007, the adjusted funding target 
attainment percentage for the 2007 plan year may be determined as the 
fraction (expressed as a percentage)--
    (1) The numerator of which is the value of plan assets determined 
under paragraph (j)(5)(iii)(D) of this section increased by the 
aggregate amount of purchases of annuities for participants and 
beneficiaries (other than participants who, at the time of the 
purchase, were highly compensated employees as defined in section 
414(q), which definition includes highly compensated former employees 
under Sec.  1.414(q)-1T, Q&A-4 which were made by the plan during the 
preceding 2 plan years, to the extent not included in plan assets under 
section 412(c)(2) (as in effect prior to amendment by PPA '06); and
    (2) The denominator of which is the plan's current liability 
determined pursuant to section 412(l)(7) (as in effect prior to 
amendment by PPA '06) on the valuation date for the second plan year 
that begins before 2008 (the 2006 plan year), including the increase in 
current liability for the 2006 plan year, increased by the aggregate 
amount of purchases of annuities that were added to the plan assets 
under the rules of paragraph (j)(5)(iii)(C)(1) of this section.
    (D) Special asset determinations for 2006 adjusted funding target 
attainment percentage--(1) General rule. If the adjusted funding target 
attainment percentage for the 2007 plan year is determined under the 
rules of paragraph (j)(5)(iii)(C) of this section, then the value of 
plan assets is determined as the value of plan assets under section 
412(c)(2) as in effect for the 2006 plan year, adjusted as provided in 
this paragraph (j)(5)(iii)(D).
    (2) Inclusion of contributions for 2006. Contributions made for the 
2006 plan year are taken into account in determining the value of plan 
assets, regardless of whether those contributions are made during the 
plan year or after the end of the plan year and within the period 
specified under section 412(c)(10) (as in effect prior to amendment by 
PPA '06).
    (3) Restriction to 90-110 percent corridor. The value of plan 
assets taking into account the amount of contributions made for the 
2006 plan

[[Page 53083]]

year is increased or decreased, as necessary, so that it is neither 
less than 90 percent of the fair market value of plan assets nor 
greater than 110 percent of the fair market value of plan assets on the 
valuation date for the 2006 plan year (taking into account assets 
attributable to contributions for the 2006 plan year).
    (4) Subtraction of credit balance. The plan's funding standard 
account credit balance as of the end of the 2006 plan year is generally 
subtracted from the value of plan assets determined after application 
of paragraph (j)(5)(iii)(D)(3) of this section. However, this 
subtraction does not apply if the value of plan assets is greater than 
or equal to 90 percent of the plan's current liability determined under 
section 412(l)(7) (as in effect prior to amendment by PPA '06) on the 
valuation date for the 2006 plan year.
    (E) Special rules for mergers and spinoffs. Rules similar to the 
rules of paragraph (j)(5)(ii) of this section apply for purposes of 
determining the adjusted funding target attainment percentage for the 
2007 plan year in the case of a newly established plan, a plan that is 
the result of a merger of two plans, or a plan that is in involved in a 
spinoff.
    (6) Prohibited payment--(i) General rule. The term prohibited 
payment means--
    (A) Any payment for a month that is in excess of the monthly amount 
paid under a straight life annuity (plus any social security 
supplements described in the last sentence of section 411(a)(9)) to a 
participant or beneficiary whose annuity starting date occurs during 
any period that a limitation under paragraph (d) of this section is in 
effect;
    (B) Any payment for the purchase of an irrevocable commitment from 
an insurer to pay benefits;
    (C) Any transfer of assets and liabilities to another plan 
maintained by the same employer (or by any member of the employer's 
controlled group) that is made in order to avoid or terminate the 
application of section 436 benefit limitations; and
    (D) Any other amount that is identified as a prohibited payment by 
the Commissioner in revenue rulings and procedures, notices, and other 
guidance published in the Internal Revenue Bulletin (see Sec.  
601.601(d)(2) relating to objectives and standards for publishing 
regulations, revenue rulings and revenue procedures in the Internal 
Revenue Bulletin).
    (ii) Special rule for beneficiaries. In the case of a beneficiary 
that is not an individual, the amount that is a prohibited payment is 
determined by substituting for the amount in paragraph (j)(1)(i)(A) of 
this section the monthly amount payable in installments over 240 months 
that is actuarially equivalent to the benefit payable to the 
beneficiary.
    (7) Section 436 contributions. Section 436 contributions are the 
contributions described in paragraph (f)(2) of this section that are 
made in order to avoid the application of section 436 limitations under 
a plan for a plan year.
    (8) Section 436 measurement date. A section 436 measurement date is 
the date that is used to determine when the limitations of sections 
436(d) and 436(e) apply or cease to apply, and is also used for 
calculations with respect to applying the limitations of paragraphs (b) 
and (c) of this section. See paragraphs (h)(1)(i), (h)(2)(iii)(B), 
(h)(2)(iv)(B), and (h)(3)(i) of this section regarding section 436 
measurement dates that result from application of the presumptions 
under paragraph (h) of this section.
    (9) Unpredictable contingent event. An unpredictable contingent 
event benefit means any benefit or increase in benefits to the extent 
the benefit or increase would not be payable but for the occurrence of 
an unpredictable contingent event. For this purpose, an unpredictable 
contingent event means a plant shutdown (whether full or partial) or 
similar event, or an event (including the absence of an event) other 
than the attainment of any age, performance of any service, receipt or 
derivation of any compensation, or the occurrence of death or 
disability. For example, if a plan provides for an unreduced early 
retirement benefit upon the occurrence of an event other than the 
attainment of any age, performance of any service, receipt or 
derivation of any compensation, or the occurrence of death or 
disability, then that unreduced early retirement benefit is an 
unpredictable contingent event benefit to the extent of any portion of 
the benefit that would not be payable but for the occurrence of the 
event, even if the remainder of the benefit is payable without regard 
to the occurrence of the event. Similarly, if a plan includes a benefit 
payable upon the presence (including the absence) of circumstances 
specified in the plan (other than the attainment of any age, 
performance of any service, receipt or derivation of any compensation, 
or the occurrence of death or disability), but not upon a severance 
from employment that does not include those circumstances, that benefit 
is an unpredictable contingent event benefit.
    (10) Examples. The following examples illustrate the rules of this 
paragraph (j):

    Example 1. (i) Plan S is a non-collectively bargained defined 
benefit plan with a plan year that is the calendar year and a 
valuation date of January 1. The first effective plan year is 2008. 
Plan S is not in at-risk status for 2008.
    (ii) As of January 1, 2008, Plan S has a value of plan assets 
(equal to the market value of assets) of $2,100,000 and a funding 
standard carryover balance of $200,000. During 2006, assets from 
Plan S were used to purchase a total of $100,000 in annuities for 
employees other than highly compensated employees. No annuities were 
purchased during 2007. On May 1, 2008, the enrolled actuary for the 
plan determines that the funding target as of January 1, 2008, is 
$2,500,000.
    (iii) The adjusted value of assets for Plan S as of January 1, 
2008, is $2,000,000 (that is, plan assets of $2,100,000, plus 
annuity purchases of $100,000, and minus the funding standard 
carryover balance of $200,000). The adjusted funding target is 
$2,600,000 (that is, the funding target of $2,500,000, increased by 
the annuity purchases of $100,000).
    (iv) Based on the above adjusted plan assets and adjusted 
funding target, the adjusted funding target attainment percentage 
(AFTAP) as of January 1, 2008, would be 76.92%. Since the AFTAP is 
less than 80% but is at least 60%, Plan S is subject to the 
restrictions in paragraph (d)(3) of this section.
    Example 2.  (i) The facts are the same as in Example 1, except 
that it is reasonable to expect that the plan sponsor will make a 
contribution of $80,000 to Plan S for the 2007 plan year by 
September 15, 2008. This amount is in excess of the minimum required 
contribution for 2007. The plan sponsor elects to reduce the funding 
standard carryover balance by $80,000.
    (ii) Because it is reasonable to expect that the $80,000 will be 
contributed by the plan sponsor, that amount is taken into account 
when the enrolled actuary certifies the 2008 AFTAP under the special 
rule in paragraph (h)(4)(i)(B) of this section for plan years 
beginning before 2009. Accordingly, the enrolled actuary for the 
plan certifies the 2008 AFTAP as 80% (that is, adjusted plan assets 
of $2,080,000, reflecting the $80,000 in contributions receivable, 
divided by the adjusted funding target of $2,600,000).
    (iii) The ability to take contributions into account before they 
are actually paid to the plan is available only for plan years 
beginning before 2009. Furthermore, if the employer does not 
actually make the contribution and the difference between the 
incorrect certification and the corrected AFTAP constitutes a 
material change, the plan will have violated section 401(a)(29) or 
will not have been operated in accordance with its terms.
    Example 3.  (i) Plan R is a defined benefit plan with a plan 
year that is the calendar year and a valuation date of January 1. 
Section 436 applies to Plan R for 2008. The valuation interest rate 
for the 2007 plan year for Plan R is 7%. The fair market value of 
assets of Plan R as of January 1, 2007, is $1,000,000. The actuarial 
value of assets of Plan R as of January 1, 2007, is $1,200,000.

[[Page 53084]]

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. No annuities were purchased using plan assets during 2005 
or 2006.
    (ii) Pursuant to paragraph (j)(5)(iii)(B)(1) of this section, 
the asset value used to determine the AFTAP for the 2007 plan year 
is limited to 110% of the fair market value of assets on January 1, 
2007, or $1,100,000 (110% of $1,000,000).
    (iii) Pursuant to paragraph (j)(5)(iii)(B)(2) of this section, 
the funding standard account credit balance as of January 1, 2007, 
is subtracted from the asset value used to determine the AFTAP for 
the 2007 plan year. However, pursuant to paragraph (j)(5)(iii)(B)(3) 
of this section, the present value of the amount by which Sponsor T 
elected to reduce the funding standard carryover balance in 2008 is 
not subtracted.
    (iv) The present value, determined at an interest rate of 7%, of 
the $45,000 reduction in the funding standard carryover balance 
elected by Sponsor T in 2008 is $42,056. Thus, $42,056 is not 
subtracted from the 2007 plan year asset value. Accordingly, the 
funding standard account credit balance that is subtracted from the 
2007 plan year asset value is $37,944 (that is, $80,000 less 
$42,056).
    (v) Thus, the asset value that is used to determine the FTAP for 
the 2007 plan year is $1,100,000 less $37,944, or $1,062,056. 
Accordingly, for purposes of this section, the FTAP for the 2007 
plan year for Plan R is 70.8% (that is, $1,062,056 divided by 
$1,500,000).
    Example 4.  (i) Plan T is a non-collectively bargained defined 
benefit plan that was established prior to 2007. Plan T has a plan 
year that is the calendar year and a valuation date of January 1. 
The first effective plan year is 2008; the plan met the conditions 
of paragraph (j)(1)(ii)(E) of this section for 2008. As of January 
1, 2009, Plan T has a value of plan assets (equal to the market 
value of assets) of $3,000,000, a funding standard carryover balance 
of $150,000, and a prefunding balance of $50,000. During 2007 and 
2008, assets from Plan T were used to purchase a total of $400,000 
in annuities for employees other than highly compensated employees. 
The funding target for Plan T (without regard to the at-risk rules 
of section 430(i)) is $3,200,000 as of January 1, 2009.
    (ii) The plan's funding status is calculated in accordance with 
paragraph (j)(1)(ii)(B) of this section to determine whether the 
special rule for fully-funded plans applies to Plan T. Accordingly, 
the value of plan assets determined without subtracting the funding 
standard carryover balance and the prefunding balance is 93.75% of 
the plan's funding target ($3,000,000 / $3,200,000). The applicable 
transitional percentage in paragraph (j)(1)(ii)(D) of this section 
is 94% for 2009. Because the percentage calculated above is less 
than 94%, the transition rule does not apply to Plan T.
    (iii) Accordingly, the January 1, 2009, AFTAP for Plan T is 
calculated without reflecting the special rule in paragraph 
(j)(1)(ii)(B) of this section. The AFTAP as of January 1, 2009, is 
calculated by dividing the adjusted assets by the adjusted funding 
target. For this purpose, the value of assets is increased by the 
annuities purchased for nonhighly compensated employees during 2007 
and 2008, and decreased by the funding standard carryover balance 
and the prefunding balance as of January 1, 2009, resulting in an 
adjusted asset value of $3,200,000 (that is, $3,000,000 + $400,000-
$150,000-$50,000). The funding target is increased by the annuities 
purchased for nonhighly compensated employees during 2007 and 2008, 
resulting in an adjusted funding target of $3,600,000 (that is, 
$3,200,000 + $400,000). The AFTAP for Plan T for 2009 is therefore 
$3,200,000 / $3,600,000, or 88.89%.

    (k) Effective/applicability dates--(1) Statutory effective date. 
Section 436 generally applies to plan years beginning on or after 
January 1, 2008. The applicability of section 436 for purposes of 
determining the minimum required contribution is delayed for certain 
plans in accordance with sections 104 through 106 of PPA `06.
    (2) Collectively bargained plan exception--(i) In general. In the 
case of a collectively bargained plan that is maintained pursuant to 
one or more collective bargaining agreements between employee 
representatives and one or more employers ratified before January 1, 
2008, section 436 does not apply to plan years beginning before the 
earlier of--
    (A) January 1, 2010; or
    (B) The later of--
    (1) The date on which the last such collective bargaining agreement 
relating to the plan terminates (determined without regard to any 
extension thereof agreed to after August 17, 2006); or
    (2) The first day of the first plan year to which section 436 would 
(but for this paragraph (k)(2)) apply.
    (ii) Treatment of certain plan amendments. For purposes of this 
paragraph (k)(2), any plan amendment made pursuant to a collective 
bargaining agreement relating to the plan which amends the plan solely 
to conform to any requirement added by section 436 is not treated as a 
termination of the collective bargaining agreement.
    (iii) 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 participants, the plan is considered a collectively 
bargained plan for purposes of this paragraph (k)(2) if it is 
considered a collectively bargained plan under the rules of paragraph 
(a)(5)(ii)(B) of this section.
    (3) Effective date/applicability date of regulations. This section 
applies to plan years beginning on or after January 1, 2010. For plan 
years beginning before January 1, 2010, plans are permitted to rely on 
the provisions set forth in this section for purposes of satisfying the 
requirements of section 436.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT


0
Par. 9. The authority citation for part 602 continues to read as 
follows:

    Authority:  26 U.S.C. 7805.


0
Par. 10. In Sec.  602.101, paragraph (b) is amended by adding entries 
for Sec. Sec.  1.430(f)-1, 1.430(g)-1, 1.430(h)(2)-1, and 1.436-1 to 
the table to read as follows:


Sec.  602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                            Current OMB
   CFR part or section where identified and described       control No.
------------------------------------------------------------------------
 
                                * * * * *
1.430(f)-1..............................................       1545-2095
1.430(g)-1..............................................       1545-2095
1.430(h)(2)-1...........................................       1545-2095
1.436-1.................................................       1545-2095
 
                                * * * * *
------------------------------------------------------------------------


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