IRS Provides Sample Plan Amendment for Underfunded Pension Plan Limitations

November 29, 2011 (PLANSPONSOR.com) – The Internal Revenue Service (IRS) has issued a notice providing a sample plan amendment that plan sponsors may adopt to satisfy § 436 of the Internal Revenue Code regarding limitations on the accrual and payment of benefits under certain underfunded single employer defined benefit plans.

The notice also extends both the deadline to amend a plan to satisfy § 436 and the period during which such an amendment is eligible for relief from the anti-cutback requirements of § 411(d)(6).  

Section 436, which was added by Pension Protection Act, sets forth a series of limitations on the accrual and payment of benefits under an underfunded plan (see IRS Issues Guidance on Benefit Limits for Underfunded DB Plans). In general, when a plan’s adjusted funding target attainment percentage (AFTAP) for the plan year is less than 60%, § 436(d)(1) prohibits the payment of prohibited payments (as defined in § 436(d)(5)), including single sum distributions, and § 436(e)(1) requires benefit accruals under the plan to cease. Section 436(b)(1) prohibits the payment of an unpredictable contingent event benefit if the plan’s AFTAP for the plan year is less than 60% or would be less than 60% taking into account the occurrence of the event.  

When a plan’s AFTAP for the plan year is less than 80%, but not less than 60%, § 436(d)(3) generally limits the portion of a benefit that may be paid in a single sum or other prohibited payment. Section 436(c)(1) generally prohibits a plan amendment from taking effect if the amendment increases the liabilities of the plan by increasing benefits and the plan’s AFTAP for the plan year is less than 80% or would be less than 80% taking into account the amendment.