The final regulations implementing provisions of the Pension Protection Act (PPA) and the Worker, Retiree, and Employer Recovery Act (WRERA) are contained in the 319-page TD 9467, which is effective October 15, 2009.
The tax agency said the rules apply to plan years starting January 1, 2010, and pertain to several aspects of Sections 430 (on minimum funding mandates) and 436 (benefit limits contingent on funding status). The provisions also take into account parallel Sections 206(g) and 303 of the Employee Retirement Income Security Act (ERISA).
The definition of a plan’s target normal cost for a plan year relied on by Section 1.430 (d)-1 includes the plan’s present value of all benefits as of the valuation date, that accrue during, are earned during, or are otherwise allocated to service for the plan year, subject to certain special adjustments by section 101(b)(2) of WRERA. For plan years starting in 2008, those special adjustments are optional, but are required to be made for later plan years, according to the regulations.
Target Normal Cost
The adjustments call for the target normal cost of the plan for the plan year to be adjusted (not below zero) by adding the amount of plan-related expenses expected to be paid from plan assets during the plan year, and by taking out the amount of any mandatory employee contributions expected to be made during that year. The tax agency said the definition of plan-related expenses is scheduled to be dealt with in forthcoming regulations.
The final regulations clarify that the benefits taken into account in determining target normal cost are the benefits that are accrued, earned, or otherwise allocated to service beginning with the first day of the plan year through the valuation date, plus benefits that are expected to accrue, be earned, or otherwise allocated to service during the remainder of the plan year.
That means, the regulations say, the actual benefits earned during the part of the year before the valuation date must be included in the target normal cost with a valuation date other than the first day of the plan year.
Under the regulations, the funding target of a plan for the plan year is the present value (determined as of the valuation date) of all benefits under the plan that have been accrued, earned, or are otherwise allocated to years of service prior to the first day of the plan year.
As under the proposed regulations, the final version that determines a plan's funding target attainment percentage (FTAP) for the 2007 plan year provide that the benefits taken into account in determining the funding target and the target normal cost are all benefits earned or accrued under the plan that have not yet been paid as of the valuation date, including retirement-type and ancillary benefits.
To determine a plan's funding target and target normal cost, the future benefits to be paid from the plan must be allocated among prior plan years, the current plan year, and future plan years.
The final regulations provide that (to the extent the amount of a benefit that is expected to be paid is neither a function of the accrued benefit nor a function of the participant's service and is not the excess of a function of the participant's service over a function of the accrued benefit) the portion of the participant's benefit that is taken into account in determining the funding target for a plan year is equal to the total benefit multiplied by the ratio of the participant's years of service as of the first day of the plan year to the years of service the participant will have at the time of the event that causes the benefit to be payable. The portion of the benefit that is taken into account in determining the target normal cost for the plan year is the increase in the proportionate benefit attributable to the increase in the participant's years of service during the plan year.
The tax agency said other rules implementing Section 430 are also forthcoming. The final rules are available here .
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