The Wait Is Over — Final Section 430 Regulations Issued at Last (Part 2)
In September 2015, more than seven years after issuing proposed rules, the IRS issued final rules under IRC §430. This article will describe the changes and additions made by the final rules.
Note: This is Part 2 of a two-part article. Part 1 appeared in the November ACOPA Monthly.
Timing and Irrevocability of Elections with Respect to Credit Balances
The final regulations added new language to regulations on the timing of elections to use the credit balances, and on the irrevocability of elections. The new language reads: “or such later date as prescribed in guidance published in the Internal Revenue Bulletin.”1 The new language allows the IRS to modify the dates for timing of elections or to revoke elections because of unforeseen need without the necessity of publishing regulations.
Similarly, the final regulations added new language to the list of deemed immaterial changes in the regulations under §436. The new language reads: “Any other event prescribed in guidance published in the Internal Revenue Bulletin.”2 The new language allows the IRS to add to the list of deemed immaterial events without the necessity to publish regulations.
Along with effective date (discussed below), the changes carry out the promises made by the IRS in Notice 2012-61 (relating to MAP-21), which has the effect of harmonizing the regulations with actions that could be taken under the notice. The reason for the provisions allowing for additions through guidance in the Internal Revenue Bulletin has to do with length of the processes. In general, it is much easier to publish a revenue ruling, notice, or announcement in the Internal Revenue Bulletin than it is to publish proposed and (later) final regulations.
No specific effective date is given for the changes which implies that they are retroactive effective. The retroactive effective date would then extend to the actions taken under Notice 2012-61.
Interest Rate Regulations Conformed to Law
The final regulations modified the existing regulations to reflect the technical changes made by HATFA or plans with valuation dates that were not the first day of the plan year.3 The 5-year period for the use of the first segment rate applies from the valuation date not the first day of the plan year. The existing regulatory language for the second and third segment rates followed the end of the period for the first segment rate so that no modification was needed to that language.
The effective date of the change in the period for the first segment rate is not given, which makes the change retroactive. However, the regulations contain a special rule for pre-2014 plan years. If the valuation date is not the first day of the plan year, the 5-year period for the first segment rate for such plan years is permitted to be the 5-year period beginning on the valuation date. The impact of this rule is to make either approach acceptable for pre-2014 plan years. Note that for plan years beginning in 2014 only the approach using the valuation date is acceptable.
New Rules for Assigning Contributions to Plan Years
The final regulations provide some specific rules for allocating contributions to plan years. The first specification finalizes the proposed rule that contributions before the first day of the plan year cannot be applied toward the MRC for that plan year.4 This rule has implications for contributions. One implication is that an employer cannot make an “early” contribution for the next plan year. A second implication is that a contribution that is not reported on any Schedule SB (for example, because it was not disclosed to the actuary) cannot be used for the later plan year. The second specification is a hierarchy of rules for allocating contributions to plan years.5 The hierarchy is that contributions are allocated (taking into account the first specification) —
(1) To the plan years with unpaid MRCs, starting with the earliest such plan year, to the extent needed to correct the unpaid MRC. (Process is repeated until all unpaid MRCs corrected or contributions used up, whichever comes first.)
(2) If made during the 8-1/2 month period after the end of a plan year, then either to the plan year in which actually made, or to the earlier plan year.
(3) If made after the end of the 8-1/2 month period, then to the plan year in which made.
The regulations provide that the allocation of a contribution to correct unpaid MRCs for prior years is automatic and “must be shown on” the Schedule SB for the “earliest plan year with respect to which, as of the date of the contribution, the deadline for making contributions” has not passed.6 Accordingly, if the contribution for an unpaid MRC is made during the 8-1/2 month period, that contribution must be reported on the Schedule SB for the prior plan year and not for the plan year in which made. Note that if there is just one contribution during the 8-1/2 month period that exceeds what is needed to correct the unpaid MRCs, then it should be divided into two pieces, one to correct unpaid MRCs (which must be reported on the Schedule SB for the prior year) and one that can be used for either the current year of the prior year.
The allocation of contributions made during the 8-1/2 month period (that are not for unpaid MRCs) is made by the completion (and filing, if required) of the Schedule SB for the plan year for which designated. Once allocated by showing the contribution on the Schedule SB, the allocation cannot be changed, except as provided in the Internal Revenue Bulletin.7 Obviously, a contribution made during a plan year, but after the end of the 8-1/2 month period for the prior plan year, can only be designated as a contribution for the plan year in which made (making the designation, in a sense, automatic). The restriction on redesignating contributions to plan years supports the Pension Benefit Guaranty Corporation (PBGC) policy statement to reject amended premium filings that request a refund of premiums based upon the redesignation of contributions to plan years.8
The regulations do not specify who makes the decision as to what plan year the contribution is allocated if there is a choice (because the contribution was made during the 8-1/2 month period). The lack of clarification is appropriate because no rule was proposed originally, and there are issues with respect to choosing either the employer or the enrolled actuary that would need to considered (after garnering comments from stakeholders). Even so, the decision of which year to allocate a contribution made during the 8-1/2 month period (which is not counted towards an unpaid MRC for a prior plan year) needs to consider a number of things. In particular, the following questions need consideration depending on the circumstances:
- Have there been other contributions for the prior plan year, or is the contribution needed to meet the MRC, which might be the case if no other contribution is anticipated?
- Will the allocation to the prior plan year result in a contribution in excess of what is needed to meet the MRC. If so, is there standing election to add the excess to the prefunding balance or will an election be needed (assuming that is a desirable goal?
- Is the allocation to the prior plan year needed to increase the funded percentage to a desired level for the current year (because the amount, with discount, will be included in the assets for the current year)?
- Is the contribution needed to satisfy quarterly contributions for the current plan year that have become due?
- Is the plan sponsor better off with higher assets for the current plan year and a lower funding shortfall as compared to a higher funding shortfall but the ability to apply the entire contribution to the current year's MRC?
- What will be the impact on PBGC variable rate premiums of either choice?
- Is it better to show the contribution as being for the prior plan year to support the plan sponsors deduction of the amount for the prior year?9
The above list is not necessarily exclusive. It is important to remember that the allocation to a prior plan year potentially impacts three plan years. For the prior plan year, it affects the amount contributed toward the MRC. For the current plan year, the funded percentage and funding shortfall are affected. For the following plan year, the presumed AFTAP and funded percentage for quarterly contributions are affected.
The treatment of an unreported contribution (that initially is not reported on the Schedule SB for either the prior year or the year in which made) is not addressed in the regulations. It appears that such a contribution under the same rules that applied at the time of the contribution. Thus, if not needed for an unpaid MRC, an unreported contribution could be used for the prior plan year, assuming it was made during the 8-1/2 month period after the end of the prior plan year, or to the plan year in which made.
The rule allocating contributions first to unpaid MRCs for prior years does not prevent the use of contributions during the 8-1/2 month period to apply either to the MRC for the prior year or to the MRC for the current year. For example, consider that the MRC for 2016 is $200,000 (as determined on the Jan. 1, 2016, valuation date), which is less than the MRC for 2015. Further assume that no contributions (and thus no quarterly contributions) for 2016 have been made as of April 15, 2017, when the employer contributes $70,000. The amount was estimated to be at least the quarterly contribution due for April 15, 2017. The regulations permit the $70,000 to be used for the April 15, 2017, quarterly contribution and do not require that it be allocated to the 2016 plan year because there it not yet an unpaid MRC for 2016. (Of course, if the $70,000 was designated for the 2016 plan year, it would be applied first against the earliest unpaid quarterly contribution.)
Quarterly Contributions and Interest Adjustments on Contributions
The final regulations generally follow the proposed regulations with respect to the calculation of quarterly contributions and adjustments for the late payment of quarterly amount, but with two important changes. First, in response to comments, the final regulations provide that a contribution that is not needed for any unpaid quarterly contributions is increased with interest (at the effective interest rate for the plan year) for purposes of satisfying later quarterly contribution requirements.10 For example, if a contribution of $9,993 is made on April 10, 2016, and the effective interest rate is 5.9%, then the contribution increased for 5 days of interest to April 15 is $10,001 and satisfies the quarterly contribution of $10,000.11
The second change is that there is now a set of rules for small plans with valuation dates that are not the first day of the plan year. Therefore, we now have rules for an end of year valuation date, and late quarterly contributions. In general, contributions made prior to the valuation date are increased with interest at the effective rate to the end of the plan year. The adjusted contributions are then compared against the MRC. However, if there are late quarterly contributions, and the due date is before the end of year valuation date, the contribution is discounted from the date contributed to the due date at the effective interest rate plus 5%. The discounted amount is then increased to the end of year valuation date at the effective interest rate, which results in more money needed to make the MRC than if the quarterly amount had been paid timely. This procedure was suggested in ACOPA's comments on the proposed regulations.
As an example, assume that the valuation date is the last day of the plan year, the quarterly contribution is $30,000, and that the effective interest rate is 5.9%. Also, assume that the $30,000 is contributed on May 15, 2017, one month late. The amount credited against the MRC for 2017 is determined in steps. First, the $30,000 is discounted for one month at 10.9% (which is 5.9% plus 5%). This produces $29,742 at April 15. Second, the $29,742 is increased to December 31, 2017, using 5.9%, which results in $30,975 to be applied toward the MRC.12 Note that the $30,000 increased with 5.9% interest from May 15, 2017, to Dec. 31, 2017, is subtracted from the plan assets for purposes of the valuation.
The final regulations also made changes to the rules for liquidity shortfalls. Since plans eligible to have end of plan year valuation dates are not subject to the liquidity shortfall rules, these changes are not discussed in this article.
Effective Date of Changes
In general, the effective date of the rules for allocating contributions and quarterly contributions is plan years beginning on or after Jan. 1, 2016. However, for earlier plan years, plans are permitted to rely upon the regulations for purposes of satisfying the requirements of §430(j). It appears that the permission to rely upon the regulations for prior plan years is an all or nothing proposition. Even if the rules are not relied upon for the earlier years, if a plan took a reasonable interpretation that followed the regulations it is doubtful that it would be seriously challenged.
1. See §1.430(f)-1(f)(2)(i), for timing and §1.430(f)-1(f)(30(i) for irrevocability.
2. See §1.436-1(h)(4)(iii)(C)(9).
3. See 1.430(h)-1(b)(2), as amended.
4. See §1.430(j)-1(b)(1).
5. See §1.430(j)-1(b)(3).
6. See §1.430(j)-1(b)(3)(iii)(A).
7. A redesignation was permitted in Notice 2012-61, but there was no specific rule in place at that time.
8. See 76 Federal Register 79,714 (Dec. 22, 2011).
9. The analysis of this question will be impacted by any future regulations under §404.
10. See §1.430(j)-1(c)(3)(ii).
11. Example 16 of §1.430(j)-1(f).
12. See example 15 of §1.430(j)-1(f).
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