The Wait Is Over — Final Section 430 Regulations Issued at Last (Part 1)
Note: This is Part 1 of a two-part article. Part 2 appears in the December ACOPA Monthly.
In September, more than seven years after issuing proposed rules, the IRS issued final rules under IRC §430 that address how to:
- determine the minimum required contribution (MRC);
- determine quarterly contributions;
- determine whether there was a liquidity shortfall and the amount of the liquidity shortfall;
- discount contributions to the valuation date to see if the MRC was met; and
- allocate contributions to correct an unpaid MRC.
In general, the final rules are effective for plan years that begin on or after Jan. 1, 2016; however, they can be applied for earlier years. This article will describe the changes and additions made by the final rules.
In April 2008, the IRS issued proposed regulations under (then) new IRC §430 that was added by the Pension Protection Act of 2006 (PPA). Section 430 replaced the pre-PPA rules with respect to the minimum funding requirements.1 Parallel changes were made to the minimum funding requirements in Title I of the Employee Retirement Income Security Act of 1974 (ERISA). The April 2008 proposed regulations did not address many questions concerning end-of-year valuation dates.2 In fact, sections were reserved for eventual rules. The preamble to the regulations noted that technical corrections were anticipated to resolve some issues, which seemed to explain the lack of proposed rules pertaining to end of year valuation dates. The IRS did state that taxpayers could rely upon the proposed rules.
The April 2008 proposed regulations followed the issuance of earlier proposed regulations under PPA concerning the determination of the funding target, the target normal cost, the maintenance and use of the funding standard carryover balance and the prefunding balance (collectively called “credit balances”), and the valuation of assets. In 2009, the earlier proposed regulations were issued as final regulations. Thus, for six years we have had final rules on calculating the funding target and target normal cost, maintaining and using credit balances, and calculating the actuarial value of plan assets, but only proposed rules on how to use the funding target and target normal cost to determine the minimum required contributions and related computations such as the quarterly contribution requirement.
In the meantime, Congress has passed several laws that affected the determination of the MRC under PPA. The Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) made many technical corrections to PPA. The Moving Ahead for Progress in the 21st Century (MAP-21) made changes to the determination of segment interest rates used to make the underlying calculations of the plan liabilities. The Highway and Transportation Funding Act of 2014 (HATFA) made additional changes to the interest rates, and made an important change to the use of segment rates to value the liabilities. And the IRS issued Notice 2012-61 and Notice 2014 to address issues with respect to MAP-21 and HATFA, respectively.
In addition, Congress passed the Preservation of Access to Care Act and Pension Relief Act of 2010 (PRA 2010), which provided funding relief for the asset losses experienced by most plans in the 2008 financial market collapse. Lastly, Congress passed the Cooperative and Small Employer Charity Act of 2014 (CSEC Act) to remove plans of certain charitable organizations out of the PPA rules and to provide instead a modified version of the pre-PPA rules.
Final Rules — What We Got; What We Did Not Get
The final rules generally followed the proposed rules for the determination of the MRC, and quarterly contributions. Sections 1.430(a)-1 and 1.430(j)-1 are now part of the regulations, and other existing sections of the regulations were amended. We got:
- answers to questions concerning plan terminations;
- additional guidance on the timing for shortfall amortization installments when the valuation date changes;
- standing elections to use credit balances for quarterly contributions;
- the adjustment of contributions for interest to meet quarterly requirements;
- additional guidance on end-of-year valuation dates that took into account the technical changes made by subsequent legislation;
- technical changes to the regulations on the timing of elections with respect to credit balances to take into account the guidance provided in notices;
- additional guidance on allocating contributions to plan years; and
- revised rules on liquidity shortfalls.
We did not get:
- any guidance on mergers and spinoffs;
- any answers on other questions raised by WRERA;
- any automatic approval to change to an end of plan year valuation date;
- any solution to a circularity issue when there is a prefunding balance and the plan is well funded; or
- any further guidance on the application of §436 to end of year valuation dates.
It is a pleasant surprise that the final rules did reflect the technical changes regarding valuation dates. In the preamble to the final rules issued in 2009, the IRS stated that the WRERA changes would be addressed in future proposed regulations so that we might have expected the same treatment for end-of-year valuation date guidance.
Short Plan Years and Terminated Plans
For a short plan year (less than 12 months), the final rules confirm that the shortfall amortization installments are prorated to reflect the length of the short plan year.3 The final rules state that if a plan’s termination date is prior to the end of the plan year, then, BF for purposes of §430, BF the plan is treated as having a short plan year that ends on the termination date. Furthermore, the regulations require that if the plan’s termination date is before the usual valuation date, the valuation date must be changed to be within the short year ending on the termination date. In requiring the change, the regulations link to the existing authority to make required changes in the valuation date. The result is that an end-of-year valuation date can be changed to any date in the short plan year (including the first day of the plan year or the plan termination date), and automatic approval is provided for the change.
One consequence of having the year of termination being treated as a short plan year is that the time period for making the final contribution is now 8-1/2 months from the termination date.4 This result is unanticipated because pre-PPA guidance (Rev. Rul. 79-237) provided that the time period was measured from the end of the plan year without regard to the termination. Note that the new rule does not appear to affect the filing date of the Form 5500 and Schedule SB, but only the deadline for timely contributing the amount to meet the MRC.
The final regulations added a definition of termination date for purposes of §1.430(a)-1. For plans subject to Title IV of ERISA, the termination date is the date established under §4048(a) of ERISA. For plans that are not subject to Title IV, the termination date is the date established by the plan administrator, provided that the termination date may be no earlier than the date on which all actions necessary to effect the plan termination (other than distribution of assets) are taken. However, additional rules apply for plans that are not subject to title IV as follows:5
Additional Rules on Plan Not Subject to Title IV of ERISA for Plan Termination Date
1. Assets must be distributed as soon as administratively feasible after that date.
2. The determination of whether distribution made as soon as administratively feasible is made under all relevant facts and circumstances.
3. In general, distribution is deemed to have been made as soon as administratively feasible to the extent any delay was because of circumstances beyond the control of the plan administrator.
4. However, a delay in distribution merely for the purpose of obtaining a higher assets value than the current market value is generally not deemed to have been made as soon as administratively feasible.
5. Distribution of assets that is not completed in one year is presumed not to have been made as soon as administratively feasible, except if the delay is attributable to the period of time necessary to obtain a determination letter (DL) upon plan termination, provided that the request for a DL is timely and the distribution is made as soon as administratively feasible after the letter is obtained.
My analysis of the additional rules suggests the following prudent courses of action depending upon the circumstances:
- Do not set a termination date unless you are reasonably sure that the plan has the assets available to make the planned upon distributions (which may include a distribution to owners that are less than the full amount of the their accrued benefit).
- Make sure that you have current addresses of plan participants when setting the termination date.
- If you are concerned about time, ask for a DL.
- Be prepared to distribute assets soon after receipt of a favorable DL.
- Document reasons for delay.
Changes in Valuation Date and Shortfall Installments
The final regulations added a new rule on the timing assumption for shortfall amortization installments when there is a short plan year. The shortfall amortization installment are assumed to be paid on the valuation date for the current plan year even if the valuation date for a later year is different than the valuation date for the plan year in which the shortfall amortization base was created.6 Thus, there will be no change in the amount of the shortfall installment on account of the change in valuation date. Any variation will become part of the new, if any, shortfall amortization base that is established. (Example 12 of §1.430(a)-1(g) illustrates this new rule.)
Standing Elections to Meet Quarterly Contribution Requirements
Many commentators on the proposed regulations requested that the final rules permit the use of standing elections to apply the credit balances to satisfy the requirement to make quarterly installments. Under the final rules, the plan sponsor may provide a standing election in writing to the plan’s enrolled actuary to use (to the extent available) credit balances to satisfy any otherwise unpaid portion of a quarterly installment.7 Any use of a credit balance pursuant to a standing election is deemed to occur on the later of the last date for making the required installment and the date the standing election is provided to the actuary. Thus, the amount available on any quarterly installment due date will depend on any other uses of the credit balances prior to the due date, and a standing election cannot apply retroactively.
Under the final rules, the otherwise unpaid portion of a quarterly installment equals the amount necessary to satisfy the MRC for the prior plan year. Accordingly, the standing election would be providing that the quarterly installment to which balances would apply is 25% of the MRC for the prior year. Of course, the actual required quarterly installment is 25% of the lesser of 100% the MRC for the prior year or 90% of the MRC for the current year (all determined with regard to the use of credit balances). At first blush, it appears that a standing election would use too much of the credit balances, which would limit the practical use. However, the regulations provide a solution for this problem.
Once the MRC for the current year has been determined, the standing election can be modified in writing for the remainder of the year. The modification can provide a replacement election so that so that the otherwise unpaid portions of the remaining quarterly installments satisfy the rules. Thus, for example, if 25% of the prior year MRC was $240,000 and the amount required once the MRC of $600,000 for the current year is known is $135,000, the standing election can be modified after the first quarterly installment to be $100,000 (1/3 of the remaining $300,0008), or provide that the second use is $30,000 (bring the total balances applied to $270,000) and the last two installments are each $135,000. The plan sponsor may also simply suspend (by written notice) the standing election for the remainder of the plan year. This is useful if the calculations of the MRC for the current year show that the MRC is zero or that the amount already applied covers all of the quarterly installments for the year.
1. For sake of brevity, this article will presume familiarity with the overall changes made by PPA and the terminology in the proposed regulations and Schedule SB to Form 5500.
2. For this article, valuation dates will considered as either being the beginning or end of the plan year.
3. The target normal cost is the value of the accruals for the short plan year (expected accruals if the valuation date is the beginning of the plan year).
4. Footnote 7 of the preamble to the final regulation makes this clear.
5. The additional rules are similar to those in Rev. Rul. 89-87 and the Internal Revenue Manual, but those rules applied to all plans rather than just plans subject to Title IV. It is likely that the additional rules in the final regulation do not apply to plans subject to Title IV because the PBGC requires somewhat similar treatment.
6. The same rule applies for waiver amortization installments.
7. The wording the regulations uses the words “required installment” whereas the words “quarterly installment” have been used here for clarity.
8. Bearing in mind that 90% of $600,000 is $540,000, which divided by four is $135,000.
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