IRS Expands PPA Transition Relief for Certain Small Plans

Because technical corrections to the Pension Protection Act (PPA) have not yet been enacted, the IRS said many small plans that would have otherwise retained end-of-year valuation dates will adopt beginning-of-year valuation dates for the 2008 plan year, and this change will make those plans ineligible for the transition relief set forth in Section III.B of Notice 2008-21. In addition, these plans may have difficulty in complying with the timing requirements for certifying the plan’s adjusted funding target attainment percentage (AFTAP).

The IRS has expanded the transition relief of Section III.B of Notice 2008-21 (See IRS Delays Effective Date for New DB Funding Calculations) to apply with respect to any plan that had an end-of-year valuation date for both the 2006 and 2007 plan years, regardless of the plan’s valuation date for 2008. The Service said it is considering the extent to which automatic approval to change valuation dates and to make other funding method changes should be granted for the 2009 plan year.

The House of Representatives and the Senate have both passed similar but not identical bills containing technical corrections to PPA (See U.S. House Passes PPA Technical Corrections Bill ) – both of which would grant the Treasury Department authority to develop special rules under § 436 with respect to plans with valuation dates other than the first day of the plan year.

Section 436 sets forth a series of limitations on the accrual and payment of benefits under an underfunded plan. Section 436(b) places limitations on the payment of plant shutdown benefits and other unpredictable contingent event benefits; § 436(c) places limitations on plan amendments that increase liabilities for benefits; § 436(d) places limitations on the payment of accelerated benefit distributions; and § 436(e) places limitations on benefit accruals. These limitations are applied based on the plan’s AFTAP for the plan year, as certified by the plan’s enrolled actuary.

Section 436(j) provides definitions that are used under § 436, including the definition of a plan’s AFTAP – determined by adding the aggregate amount of purchases of annuities for employees other than highly compensated employees (within the meaning of § 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 plan’s funding target attainment percentage (FTAP).

Notice 2008-73 is here .