Important Information
Plan Administration and Operation
January 2010
IRS issues benefit restriction regulations
Who’s affected
These developments affect sponsors of and participants in qualified single-employer and multiple employer defined
benefit plans. They do not affect multiemployer plans, governmental plans or church plans that do not elect to be covered
by ERISA (“non-electing church plans”).
Background and summary
For plan years beginning on and after January 1, 2008, the Pension Protection Act of 2006 (PPA) imposed new benefit
restrictions on plans that do not meet specific funding percentage levels.
In early 2008, the IRS advised plan sponsors that for the 2008 plan year, they only needed to apply a reasonable
interpretation of the law. In addition, the IRS provided transitional guidance for plan years beginning before final
regulations became effective.
Recently, the IRS issued final regulations for applying the new benefit restrictions. These regulations incorporate changes
made to the PPA rules by the Worker, Retiree and the Employer Recovery Act of 2008 (WRERA) and provide guidance
regarding:
The various types of restrictions that may apply;
The impact of these rules on plan amendments;
Participant notice requirements; and
Techniques to avoid the application of benefit restrictions.
This Pension Analyst discusses the final regulations that apply to single-employer and multiple employer defined benefit
plans in an effort to help plan sponsors determine the future actions necessary to keep their plans in compliance with
ERISA and the Internal Revenue Code.
Action and next steps
The final regulations affect plan design and administration. Plan sponsors should carefully read the information contained
in this Pension Analyst and discuss the impact of these complex regulations on their plans with their enrolled actuary and
legal counsel.
The final regulations are effective for plan years beginning on or after January 1, 2010. For plan years beginning before
January 1, 2010, plans may comply with either these final regulations or the 2007 proposed regulations.
In this issue
Measurement date
Impact on plan terminations
Contingent event benefits
Benefit increases
Prohibited payments
Benefit accruals
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Prudential Retirement, Prudential Financial, PRU, Prudential and the Rock logo are registered service marks of The Prudential Insurance Company of America,
Newark, NJ and its affiliates.
January 2010
Impact on plan amendments
Notice to participants
Techniques to avoid benefit restrictions
Actuarial certification and presumptions
Collectively bargained plans
Multiple employer plans
Next steps
In general, single-employer and multiple employer plans that do not meet specific funding levels are subject to certain
benefit restrictions. Under PPA, restrictions apply to:
The payment of unpredictable contingent event benefits (e.g., plant shutdown benefits);
The adoption of plan amendments that increase or improve benefits;
The payment of prohibited payments (e.g., lump sum payments); and
Ongoing benefit accruals.
However, during the first five plan years of a plan’s existence only the prohibited payments restriction applies. The final
regulations clarify that, for this purpose, “plan years” include plan years when the plan was maintained by a predecessor
employer. Plans that froze benefit accruals on or before September 1, 2005, are not subject to any of these restrictions.
Measurement date
The final regulations introduce the term “measurement date” to identify the dates on which a benefit restriction may apply
or cease to apply. For example, if a prohibited payment restriction applies to the plan as of the measurement date, but
that restriction ceases to apply at a later measurement date, then the restriction does not apply to benefits with annuity
starting dates that occur on or after the second measurement date.
A plan may be amended to provide participants who had annuity starting dates within a benefit restriction period with the
opportunity to elect new forms of benefit once the benefit restriction is removed. If a participant elects a new form of
benefit, he is treated as having a new annuity starting date and the election is subject to the spousal consent rules.
Impact on plan terminations
The final rules also address the impact of these benefit restrictions on terminated plans. In general, any restriction in
effect immediately before the plan termination date continues to apply. However, the restrictions do not apply to
prohibited payments that are made to carry out the termination of the plan. For example, a plan sponsor’s purchase of
deferred annuities from an insurer in connection with a standard plan termination is permitted.
Contingent event benefits
As required by PPA, the final regulations prohibit a plan from paying unpredictable contingent event benefits, such as
plant shutdown benefits, if the plan’s adjusted funding target attainment percentage (AFTAP) is less than 60% or would be
less than 60% as the result of paying such benefits. A plan’s AFTAP is expressed as a percentage of the plan assets
over the funding target for the plan year, adjusted by adding to both plan assets and the funding target the value of
annuities purchased for all non-highly compensated employees for the preceding two years.
This restriction expires as of the first day of the plan year in which the plan sponsor makes a plan contribution equal to
the:
Minimum required contribution; and
Amount necessary to pay for these benefits or an amount to satisfy the 60% funding requirement.
Benefit increases
The final regulations prohibit the adoption of plan amendments that increase benefits or establish new benefits if the
plan’s AFTAP is less than 80%, taking the amendment into account. However, this restriction does not apply if the
employer makes contributions to the plan to either completely fund the benefit increase or satisfy the 80% funding
requirement. In addition, the restriction does not apply if the plan’s benefit formula is not based on a participant’s pay, as
long as the increase reflects the increase in average wages of plan participants.
©2010, The Prudential Insurance Company of America, all rights reserved.
Prudential Retirement, Prudential Financial, PRU, Prudential and the Rock logo are registered service marks of The Prudential Insurance Company of America, Newark, NJ and its affiliates.
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January 2010
In general, if an amendment increases benefits for both currently employed participants and terminated participants, all
covered participants must be included in determining the increase in average wages, even though the terminated
participants will have no increase or decrease in wages.
Alternatively, an employer may adopt two amendments, one that increases benefits for currently employed participants
and another that increases benefits for terminated participants. As a result, if the plan’s benefit formula is not based on a
participant’s pay the amendment that increases benefits for currently employed participants (based only on wages of
those current employees) may not be subject to benefit restrictions, but restrictions will apply to the amendment affecting
terminated participants (who have no increases in wages).
The benefit increase restriction also does not apply to a plan amendment that increases vesting percentages to comply
with ERISA requirements, such as plan termination amendments, partial plan termination amendments or vesting
increases required by the top-heavy rules.
Prohibited payments
Under the final regulations, a plan cannot make a prohibited payment for participants with annuity starting dates occurring
when the:
Plan has an ATFAP of less than 60%; or
Employer is in bankruptcy and the plan’s AFTAP is less than 100%.
A “prohibited payment” is any:
Payment exceeding the monthly amount payable under a single life annuity (plus any social security supplements)
to a participant or beneficiary whose annuity starting date occurs during a period when the benefit restriction is in
effect;
Payment for the purchase of deferred annuities from an insurer to pay benefits; and
Other payment specified by the IRS.
The most common prohibited payment is a lump sum payment. The final regulations also clarify that prohibited payments
include any transfer of assets and liabilities to another plan maintained by the same employer (or a member of its
controlled group) made to avoid the application of benefit restrictions.
If a plan’s AFTAP is between 60% and 80%, the plan cannot make a prohibited payment if the amount of the payment
exceeds the lesser of:
50% of the amount that could be paid in the optional form that includes the prohibited payment; or
The present value of the participant’s maximum PBGC guarantee.
The final regulations clarify that this determination is based on the specific optional form of payment. If the optional form
of payment provides payments greater than the amount payable under a straight life annuity, then the excess amount is a
prohibited payment.
The IRS has also clarified that a plan that offers optional forms of payment must allow participants to elect to:
Receive the unrestricted portion of an optional form of payment;
Begin receiving payments under another optional form; or
Defer their payment starting dates.
A participant may only delay his payment starting date if the plan document provides this option. In addition, any delay in
the payment starting date must comply with plan qualification requirements such as the minimum required distribution
rules.
The final regulations also allow plans to offer special optional forms of payment during the period that a benefit restriction
is applied. For example, a plan may permit individuals who begin receiving benefit payments during this period to elect,
within a specified period after the restriction 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. However, any such election is considered a new
annuity starting date and is subject to the spousal consent rules.
©2010, The Prudential Insurance Company of America, all rights reserved.
Prudential Retirement, Prudential Financial, PRU, Prudential and the Rock logo are registered service marks of The Prudential Insurance Company of America, Newark, NJ and its affiliates.
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January 2010
Benefit accruals
The final regulations also restrict benefit accruals if a plan’s AFTAP is less than 60%. In this situation, the plan must
freeze all future benefit accruals as of the valuation date for the plan year. However, the restriction ceases to apply as of
the first day of the plan year in which the plan sponsor contributes to the plan an amount equal to:
The minimum required contribution; and
An amount to satisfy the 60% funding level.
A plan may be amended to provide that any benefit accruals that were limited during the restricted period will be credited
under the plan once the restrictions no longer apply. However, this provision is permitted only if the:
Restricted period is 12 months or less; and
Plan’s enrolled actuary certifies that the AFTAP for the plan would not be less than 60% taking into account the
restored benefit accruals.
Impact on plan amendments
The final regulations provide that if plan amendments cannot take effect as the result of benefit restrictions, they are
treated as never adopted, unless the plan provides otherwise. For example, a plan amendment that increases benefits
pursuant to a collective bargaining agreement can provide that if the plan amendment does not take effect due to benefit
restrictions, it will take effect at the earliest time it is permitted to take effect.
If an amendment does not go into effect as of its intended effective date due to benefit restrictions, but is permitted to go
into effect later in the plan year due to additional contributions 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.
Notice to participants
A plan administrator must provide a written notice to participants and beneficiaries within 30 days after the:
Date that the plan becomes subject to a shutdown benefit restriction or prohibited payment restriction; and
Valuation date for the plan year for which the plan’s AFTAP is less than 60% or is presumed to be less than 60%.
The IRS expects to issue participant notice guidance in the future. Until that guidance is provided, the IRS has indicated,
in its October 2009 Employee Plans News that plans do not have to provide a benefit restriction notice to participants and
beneficiaries in pay status when the ability to elect a lump sum payment is restricted. This should reduce costs,
administrative burdens and participant confusion.
Earlier this year, the DOL published final regulations that authorize the assessment of civil penalties, not to exceed $1,000
per day for each violation by any person, against plan administrators, for failure to provide participants and beneficiaries
with the notice of benefit restriction.
Techniques to avoid benefit restrictions
In general, there are four methods a plan sponsor may use to avoid or end one or more benefit restrictions. A plan
sponsor may:
Make an additional contribution for the current plan year to end or avoid the application of an unpredictable
contingent event benefit restriction, a plan amendment restriction or a benefit accrual restriction. Any contribution
made on a date other than the valuation date must be adjusted for interest. A plan sponsor may not elect to use a
credit balance as a current year contribution for this purpose. In addition, the contribution cannot be
recharacterized to satisfy the minimum required contribution requirement.
Provide security to the plan as plan assets. For this purpose, the plan’s AFTAP is determined by treating any
security as a plan asset by the valuation date. However, this security is not taken into account as a plan asset for
any other purpose. Acceptable forms of security are:
o Bonds issued by a corporate surety that is acceptable under ERISA; or
o Cash or U.S. government bonds that mature in three years or less, held in escrow by a bank or an
insurance company.
Reduce the plan’s credit balance in an amount sufficient to avoid the restriction; or
Make an additional contribution for the prior plan year.
©2010, The Prudential Insurance Company of America, all rights reserved.
Prudential Retirement, Prudential Financial, PRU, Prudential and the Rock logo are registered service marks of The Prudential Insurance Company of America, Newark, NJ and its affiliates.
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January 2010
The final regulations also provide new rules regarding the replacement of a security. For example, if security has been
provided to the plan, the plan sponsor may provide new security and later or simultaneously have the original security
released. This replacement can only occur if the new security is an acceptable security as described above and 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.
Actuarial certification and presumptions
The final regulations provide a series of presumptions that apply before the enrolled actuary certifies the plan’s AFTAP. If
a plan was subject to restrictions during the prior 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 AFTAP for the current year. The enrolled actuary’s
certification must be provided to the plan administrator in writing.
If an enrolled actuary does not certify the AFTAP for the current plan year by the fourth month of the plan year (e.g., April
1 for a calendar plan year), the AFTAP is presumed to be 10% lower than the prior plan year’s level if the plan’s AFTAP
for the prior plan year was between 60% and 70% or between 80% and 90%. Otherwise, the AFTAP remains the same
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until certified by the plan’s enrolled actuary or until the first day of the 10 month. If a plan’s actuary does not certify the
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plan’s AFTAP by the first day of the 10 month of the plan year (e.g., by October 1 for a calendar year plan), the AFTAP is
presumed to be less than 60% as of that date.
A plan’s enrolled actuary may issue a certification during the first nine months of a plan year stating that the plan’s AFTAP
is within a certain range (“range certification”) that is either:
Less than 60%;
60% or higher, but less than 80%;
80% or higher; or
100% or higher.
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 year by the last day of the plan year, the AFTAP for the plan is retroactively deemed to be
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less than 60% as of the first day of the 10 month of the plan year.
If the enrolled actuary issues a certification that is superseded by a later AFTAP certification, that later percentage must
be applied from the original certification date. A change in a plan’s certified AFTAP is a material change if a plan’s
operations with respect to benefit restrictions, taking into account any actual contribution and funding elections made by
the plan sponsor, would have been different based on the later AFTAP determination for the plan year.
However, a change in the AFTAP is considered to be immaterial 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. Other immaterial
changes include:
Additional contributions made by the plan sponsor for the preceding plan year;
A plan sponsor’s election to reduce the prefunding or funding standard carryover balance;
A plan sponsor’s election to apply the prefunding or funding standard carryover balance to offset the prior plan
year’s minimum required contribution;
A change in the funding method or actuarial assumptions, where the change required approval of the IRS; or
Unpredictable contingent event benefits because the employer makes a required contribution.
Collectively bargained plans
Under the final regulations, a collectively bargained plan must reduce its credit balance if this would avoid restrictions on
benefit accruals, benefit increases, or contingent event benefits. If a plan covers both collectively-bargained and noncollectively-bargained employees, it will be considered a collectively bargained plan if:
At least 25% 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; or
At least 50% of the employees benefiting under the plan are members of collective bargaining units for which the
benefit levels under the plan are specified under a collective bargaining agreement.
©2010, The Prudential Insurance Company of America, all rights reserved.
Prudential Retirement, Prudential Financial, PRU, Prudential and the Rock logo are registered service marks of The Prudential Insurance Company of America, Newark, NJ and its affiliates.
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January 2010
Multiple employer plans
The final benefit restriction regulations apply separately for each participating employer in a multiple employer plan, as if
each employer maintained a separate plan. As a result, each employer will have its own funding target. In addition,
benefit restrictions could apply differently to participants who are employees of different employers under a multiple
employer plan.
Next steps
The final regulations do not address issues such as participant notices on benefit restrictions or the impact of the benefit
restriction rules on mergers and spinoffs. The IRS intends to issue additional regulations on these topics. We will keep
you informed on these developments as future guidance is issued.
The final regulations are extremely complex. If you have questions about them and their application to your plan, you
should contact your plan’s enrolled actuary to determine if plan administrative or funding changes may be needed. The
plan’s enrolled actuary is in the best position to provide assistance regarding compliance with these new rules.
Pension Analyst by Prudential Retirement
The Pension Analyst is published by Prudential Retirement, a Prudential Financial business, to provide clients with information on current legislation and
regulatory developments affecting qualified retirement plans. This publication is distributed with the understanding that Prudential Retirement is not
rendering legal advice. Plan sponsors should consult their attorneys about the application of any law to their retirement plans.
Editor: Mitzi Romano
(860) 534-2768
©2010, The Prudential Insurance Company of America, all rights reserved.
Prudential Retirement, Prudential Financial, PRU, Prudential and the Rock logo are registered service marks of The Prudential Insurance Company of America, Newark, NJ and its affiliates.
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